Dba1607 Legal Aspects of Business PDF

DBA 1607
LEGAL ASPECTS OF BUSINESS
UNIT - I
MERCANTILE AND COMMERCIAL LAW
1.1
Introduction Nature of Contract (Sections 1.2) Taking a seat in a bus, putting a coin in the slot of a weighing machine, going to a restaurant and taking snacks - all these actuities are based on contracts: We do not even realize that we are making a contract. People who are engaged in trade, commerce and industry, carry on business by entering into contracts. The law relating to contracts is to be found in the Indian contracts Act 1872. It contains principles, subject to which parties may assign / form rights and duties for themselves and the law will uphold their rights and duties. The sale of goods is the most common of all commercial contracts. Knowledge of its main principles is of the utmost importance to all classes of the community. The law relating to it is contained in the Sale of Goods Act, 1930. Contracts for the sale of goods are subject to the general legal principles applicable to all contracts, such as ,offer and its acceptance, the capacity of the parties, free and real consent, consideration and legality of the object. There are certain documents which are freely used in commercial transactions and monetary dealings. These documents, if they satisfy certain conditions, are known as negotiable instruments. The word for consideration and instrument means a written document by which a right is created in favour of some person. Thus a negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by endorsement and delivery. The complexities of modern business are such that it is not possible for any man to transact all his business by himself. He cannot personally attend to all matters in which it is necessary for him to be brought into
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legal relations with other people. Of necessity he has to depend on the services of other persons in order to run day-to-day business affairs. Such other persons are called agents. 1.2 Learning Objectives After studying this unit you should be able to:

Define a contract Understand the essentials of contract. Describe the differences between the void, voidable and null void contracts. Implementing the formalities in forming a contract Analyze the performance of contracts Understand the breach of contract and its remedies
1.3 The Indian Contract Act 1872 What is a contract? Contract: An agreement enforceable by law (sec 2 (b)) Agreement: Every promise and every set of promises forming consideration for each other (sec 2 (e)) Promise: When the person to whom the proposal is made signifies his ascent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise. Agreement: Accepted proposal. The two elements are : (i) offer or a proposal and (ii) An acceptance of that offer or proposal. The contract act is the law of those agreements which create obligations and in case of a breach of a promise by any other party to the agreement; the other party will have a legal remedy. There are some agreements, which are not enforceable in the court of law. Such agreements which do not give rise to contractual obligations, then it will not be a contract. Example: 1. A invited B for a dinner in a restaurant. B accepts the invitation. On the appointed day, B goes to the restaurant. A does not turn up or A is there but refuses to entertain B. B has no remedy against A. In case A is present but B fails to turn up, A has no remedy against B. 2. A promises his son a pocket allowance of Rs. 500 a month. In case A fails or refuses to give his son the promised amount, his son has no remedy against A. A contract is an agreement but an agreement need not necessarily be a contract. What obligations are contractual in nature? Only a legal obligation having its source in an agreement will give rise to a contract.
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Example: A agrees to sell his car to B for Rs. 50,000. The agreement gives rise to a legal obligation on the part of A to deliver the car to B and on the part of B to pay Rs. 50,000 to A. The agreement is a contract. If A does not deliver the car, then B can go to a court of law and file a suit against A for non-performance of the promise on the part of A. On the other hand, if A has already given the delivery of the car and B refuses to make the payment of price, A can go to a court of law and file a suit against B for non-performance of promise on the part of B. Agreements to do an unlawful, immoral or illegal act for example, smuggling, or murdering a person cannot be enforceable by law. Certain agreements have been declared void or unenforceable under the Indian Contracts Act. An agreement to betting (wagering agreement), an agreement in restraint of trade, an agreement to do an impossible advertisement are a few such examples. An obligation which does not have its origin in an agreement does not give rise to a contract. Some of such obligations are tort or civil wrongs, quasi contract, judgment of courts, Relation between husband and wife, Relation between trustee and location. These obligations are not contractual in nature but are enforceable in a court of law. 1.3.1 Essential elements of a valid contract 1. Agreement 2. Intention to create legal relationship 3. Free and Genuine consent 4. Parties competent to contract 5. Lawful consideration 6. Lawful Object 7. Agreements not declared void or illegal 8. Certainity of meaning 9. Possibility of performance 10. Necessary legal formalities 1. Agreement-[Offer and Acceptance]

Party making the offer - Offeror Party to whom the offer is made Offeree There are two parties to an agreement They both must be thinking of the same thing in the same sense There must be Consensus ad idem
Example: Where A owns two cars X and Y and wishes to sell his car X for Rs. 30,000.B an acquaintance of A does not know that A
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owns car Y also. He thinks that A owns only car X and is offering to sell the same for the stated price. He gives him acceptance to buy the same. There is no contract because the contracting parties have not agreed on the same thing at the same time. There is no consensus ad - idem. 2. Intention to create Legal Relationship: An agreement of a purely social or domestic nature is not a contract. A husband agreed to pay Dollar 30 to his wife every month while he was abroad. As he failed to pay the promised amount, his wife sued him for the recovery of the amount. Held: It was a social agreement and the parties did not intend to create any legal relations. Example 1 : One of the clauses included in an agreement was, This agreement is not a formal legal agreement and shall not be subject to legal jurisdiction in the law courts. Held that this agreement was not a legally binding contract as the parties intended not to have legal consequences (Rose and Frank Co U J.R. Crompton and Bus Ltd., (1925) A.C 445). Example 2 : An agreement containing a clause, states It does not give rise to any legal relationships or be legally enforceable, but binding in honour only. Held: The agreement did not give rise to legal relations and therefore was not a contract. (Jones V vertons Pools Ltd (1938) 2 AIR. Example 3 : An aged couple (C and his wife) held out a promise by correspondence to their niece and her husband (Mrs. and Mr. P.) that C would sell them a portion of his estate in his will, if Mrs. P and Mr. P would sell their cottage and come to live with the aged couple and to shared the household and other expenses. The young couple sold their cottage and started living with the aged couple and shared the household and other expenses. The two couples subsequently quarrelled and the aged couple repudiated the agreement by requiring the young couple to stay somewhere else. The young couple filed a suit against the aged couple for the breach of promise. Held: That there was intention to create legal relations and the young couple could recover damages (Parker V Clarke (1960) 1 W.L.R. 286) 3. Free and genuine consent: The consent of the parties to the agreement must be free and genuine. The consent of the parties should not be obtained by misrepresentation, fraud, undue influence, Coercion or mistake. If the consent is obtained by any of these flaws, then contract is not valid. 4. Parties competent to contract: Every person is competent to contract if he is (i) of the age of majority (ii) is of sound mind and (iii) is not disqualified from contracting by any law to which he is subjected.
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5. Lawful consideration: Each party of an agreement must give or promise something and receive something or a promise in return. Consideration is the price for which the promise of the other is sought. However, the price need not be in terms of money. In case the promise is not supported by consideration, the promise will be nudum pactum (a bare promise) and not enforceable by law. The consideration must be real and lawful. 6. Lawful object: The object of the agreement must be lawful and not one which the law disapproves. 7. Agreement not declared illegal or void: There are certain agreements which have been expressly declared illegal or void by the law. In such cases, even if the agreement possesses all the elements of a valid agreement, the agreement will not be enforceable by law. 8. Certainty of meaning: The meaning of the agreement must be certain or must be capable of being made certain. Otherwise the agreement will not be enforceable by law. For e.g. A agreed to sell 10 meters of cloth. There is nothing to show, what type of cloth was intended. The agreement is not enforceable for want of certainty of meaning. 9. Possibility of performance: The terms of the agreement should be capable of performance. An agreement to do an act impossible in itself cannot be enforced. For instance, A agrees with B to discover treasure by magic. The agreement cannot be enforced. 10. Necessary Legal formalities: A contract may be in oral or in writing. If however, a particular type of contract is required by law to be in writing, it must comply with necessary formalities as to writing, registration and attestation if necessary. If these legal formalities are not carried out, then the contract is not enforceable by law. 1.3.1.2 Classification of contracts: Contracts are classified on the basis of, I- Terms of validity or enforceability II- Mode of formation III- Performance I - Terms of validity or enforceability
VALID VOIDABLE VALIDITY OR ENFORCEABILITY VOID ILLEGAL UNENFORCEABLE
II - Mode of formation
EXPRESS MODE OF FORMATION IMPLIED QUASI CONTRACTS
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III-Performance
EXECUTED EXECUTORY ACCORDING TO PERFORMANCE UNI-LATERAL BI LATERAL
1.3.2 VOID AGREEMENTS. To constitute a valid contract it should have all the essential elements discussed earlier. If one or more of these elements is / are found missing, the contract is voidable, void, illegal or unenforceable. Voidable contract is one which may be repudiated at the will of one of the parties, but until it is repudiated it remains valid and binding. If it is affected by a flaw (e.g. simple misrepresentation, fraud, coercion, undue influence) and the presence of anyone of these defects enables the party aggrieved to take steps to repudiate the contract, it shows that the consent of the party who has the discretion to repudiate was not free. Example: A a man enfeebled by disease or age is induced by Bs influence over him as his medical attendant to agree to pay B an unreasonable sum for his professional services. B employs undue influence. As consent is not free, he can take steps to set the contract aside. An agreement which is not enforceable by either of the parties to it is void. Such an agreement is without any legal effect ab initio (from the very beginning). Under the law, an agreement with a minor is void. A contract, which ceases to be enforceable by law, becomes void when it ceases to be enforceable. Example: (1) A and B contract to marry each other. Before the time fixed for the marriage A goes mad. The contract becomes void. (Subsequent impossibility) (2) A contracts to take B to a foreign port by indigo ship. Government afterwards declared war against the country in which port is situated. The contract becomes void when war is declared. (Subsequent illegality) An illegal agreement is one the consideration or object of which is: (1) forbidden by law (2) defeats the provision of any law or (3) is fraudulent or (4) involves or implies injury to the person or property of another or (5) Court regards it as immoral or opposed to the public policy. (1) Illustration, A, B and C enter into an agreement for the division among them of gains acquired or to be acquired by them through gambling which is prohibited by law. The agreement is illegal.
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(2) A promises to obtain for B an employment in the public service, and B promises to pay Rs. 1, 00,000 to A. The agreement is illegal. In Mumbai, the wagering agreements have been declared unlawful by statute. A lets with B in settlement of As losses. C cannot recover from A because this is money paid under or in respect of of a wagering transaction which is illegal in Mumbai. An unenforceable contract is neither void nor voidable but it cannot be enforced in the court because it lacks some items of evidence such as writing, registration or stamping. For instance an agreement which is required to be stamped, will be unenforceable if the same is not stamped at all or is under stamped. Contracts which must be in writing: (a) (b) (c) (d) (e) (f) A negotiable instrument Memorandum and Articles of Association of a company. An application for shares in a company. An application for transfer of shares in a company. A promise to pay time barred debt. A lease, gift, sale or mortgage of immovable property.
Some of the contracts and documents evidencing contracts are in addition to be in writing, required to be registered also. These are: (a) Documents coming within the preview of Section 17 of the Registrations Act 1908. (b) Transfer of immovable property under the Transfer of property Act. (c) Contracts without consideration but made on account of natural love and affection between parties standing in near relation to each other. (d) Memorandum of Association and Articles of Association of a company. 1.3.3 Formation of a Contract Classification According to Mode of Formation Express-The terms of a contract may be stated in words (written or spoken) Implied-Terms of a contract may be inferred from the conduct of parties or from the circumstances of the case Taking a seat in a Public Transport Bus. Offer and Acceptance (sections 3-9) Offer / proposal When one person signifies to another about his willingness to do or to abstain from doing anything with a view to obtaining the consent of other to such act or abstinence, he is said to make a proposal. (1) A offers to sell his book to B. A is making an offer to do something i.e. to sell his book. It is a positive consent on the part of the proposer.
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(2) A offers not to file a suit against B, if the latter pays A the outstanding amount of Rs. 200. Here the act of A is a negative one i.e. he is offering to abstain from filing a suit. How an offer is made? By any act or omission By Act By words (written or oral) In person or over telephone etc. By Conduct By positive acts or signs silence cannot amount to offer by conduct. By omission Includes such conduct or forbearance on ones part (not the other person takes it as his willingness or absent). E.g. (1) A proposes by letter to sell a house to B at a certain price. This is an offer by an act by written words (i.e. letter). This is also an express offer. (2) A proposes over telephone to sell a house to B at a certain price. This is an offer by an act (by oral words). This is an express offer. (3) A owns a motor boat for taking people from Mumbai to Goa. The boat is in the waters at the Gateway of India. This is an offer by B to take passengers from Mumbai to Goa. He had not spoken or called the passengers. The very fact is that this motor boat is in the water near Gateway of India and this signifies his willingness to do an act with a view to obtain the consent of the other. This is an example of an implied offer. (4) A filed a suit against Note : Whom ? mention if the latter pays A the amount of Rs. 200 outstanding. This is an offer by abstinence or omission to do something.
Carlill Vs Carbolic Smoke ball co.: The patent medicine company advertised that it would give a reward of $100 to any one who contracted by influence after using the smoke balls of the company for a certain period according to the printed directions. Mrs. Carlill purchased the advertised smoke ball and contracted influenza in spite of using the smoke ball according to the printed instructions. She claimed the reward of $100. The claim was resisted by the company on the ground that the offer was not made to law and in any case she had not communicated her acceptance of the offer. She filed a suit for the recovery of the reward.
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Held:- She could recover the reward as she had accepted the offer by complying with the terms of the offer. 1.3.4 Essential requirements of a valid offer 1. The offer must be made with a view to obtain acceptance. 2. The offer must be made with a view to create legal relation. 3. The terms of offer must be definite, unambiguous and certain or capable of being made certain. The terms of the offer must not be loose, vague or ambiguous. Ex.1. A offers to sell B a hundred quintals of oil. There is nothing whatever to show what kind of oil was intended. The offer is not capable of being accepted for want of certainty. Ex.2. A who is a dealer in coconut oil only offers to sell to B one hundred quintal of oil. The nature of As trade offers an indication of the meaning of the words and this is a valid offer. 4. An offer must be distinguished from a) mere declaration of intention or (b) an invitation to offer or to treat. 5. The offer must be communicated to the offeree. 6. The offer must not contain a term of the non-compliance of which may be assumed to amount to acceptance. Ex. A tells B that he will offer to sell his dog to B for Rs. 4500; if B do not send his reply, A shall assume that B has accepted the offer. Here the offer is not a valid one. 7. A tender is an offer as it is in response to an invitation to offer. 8. The special terms forming part of the offer must be duly brought to the notice of the offeree at the time when the offer is made. The terms may be brought to his notice either by drawing his attention to them specifically or by inferring that of ordinary prudence could find them by exercising ordinary intelligence. If the conditions are contained in a document which is delivered after the contract is complete, then the offeree is not bound by them. When two parties make identical offers to each other, in ignorance of each others offer, the offer is known as cross offer and neither of the two can be called an acceptance of the other and therefore there is no contract. Termination or lapse of an offer:1. The offer lapses after stipulated or reasonable time. 2. An offer lapses by the insanity of the offeror or the offeree before acceptance. 3. An offer terminates when rejected by the offeree. 4. An offer terminates when revoked by the offerer before acceptance. 5. An offer terminates by not being accepted in the mode prescribed or if no mode is prescribed in some usual and reasonable manner. 6. A conditional offer terminates when the condition is not accepted by the offeree. 7. An offer terminates by counter offer by the offeree.
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Acceptance

- Act of giving consent to the proposal - Express - oral or written Implied (Carlill Vs Carbolic Smoke Ball Co.) Who can accept - Specific offer Only by the person to whom it is made. General offer By anyone complying with the terms of the offer (Carlill Vs Carbolic Smoke Ball Co.) Acceptance How it is Made
Essentials of a valid acceptance 1. Acceptance must be absolute and unqualified. 2. It must be communicated. 3. It must be according to the mode prescribed. 4. It must be given within the time specified or within the reasonable time. 5. It must be in response to an offer. 6. It must be made before the offer lapses. 7. It must be given by the person to whom the offer is made. Communication of offer, acceptance and revocation Offer must be communicated to the offeree and the acceptance must be communicated to the offeror. Revocation of offer by the offeree to the offeror and revocation of the acceptance by the offeree to the offeror must be communicated. Communication of the proposal is complete when it comes to the knowledge of the person to whom it is made. Completion of communication of acceptance has two aspects, they are: (i) as against the proposer and (ii) as against the acceptor
The communication of acceptance is complete (i) As against the proposer when it is put into a couple of transmission to him so as to be out of the power of the acceptor. (ii) As against the acceptor when it comes to the knowledge to the proposer. The communication of a revocation (of an offer or an acceptance) is complete(i) as against the person who make it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it. (ii) as against the person to whom it is made when it comes to his knowledge. A proposal may be revoked at any time before the communication of the acceptance is complete as against the acceptor but not afterwards.
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1.3.5 Performance of Contracts Classification according to Performance Executed Wholly performed. A creates a contract to buy a bicycle from B for cash. A pays cash and B delivers the bicycle. Executory Wholly unperformed or partly performed. 1) On June 1, A agrees to buy a bicycle from B. The contract i.e., to be performed on June 15th and A has to pay the price on July 1.A agrees to buy the bicycle from B. The contract is to be performed on June 15th. On 15th June, if both perform their obligations, then we can say that contract becomes executed. (2) On June 1, A agrees to buy a bicycle from B. B has to deliver the bicycle on June 15th and A has to pay the price on July 1. B delivers the bicycle on June 15. The contract is still executory as something remains to be done in terms of the contract. Unilateral - At the time when the contract is concluded, if there is an obligation to be performed only by one party then it is called as unilateral. A makes payment for bus journey from Mumbai to Pune. He has performed his promise. It is now for the transport company to perform the promise. Bilateral - There is an obligation on the part of both to do or to refrain from doing a particular thing similar to the executory contracts. Contract is a contract from the time it is made and not from the time its performance is due. 1.3.6 Discharge of contract Discharge of contract means termination of the contractual relationship between the parties. A contract is said to be discharged when it ceases to operate, i.e., when the rights and obligations created by it comes to an end. In some cases, other rights and obligations may arise as a result of discharge of contract but they are altogether independent of the original contract. A contract may be discharged: 1. by performance. 2. by mutual agreement or consent. 3. by impossibility. 4. by lapse of time. 5. by operation of law. 6. by breach of contract. The above said methods of discharge of contract are explained below:
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1. Performance Discharge by performance takes place when the parties fulfill their obligations arising under the contract within the time and in the manner prescribed. In such a case, the parties are discharged and the contract comes to an end. If only one party performs the promise then it is considered that only one is discharged. He gets his right against the other party who is guilty of breach. The Performance of a contract is usually operated in two modes. 1. Actual performance- when both the parties performed their promises, the contract is discharged. Performance should be complete, precise according to the terms of the agreement. 2. Attempted performances (or) tender are not actual performance but its only an offer to perform the obligation under the contract. 2. Mutual Agreement or Consent. The contract makes a contractual obligation which is discharged by agreement which may be expressed or implied. The various cases of discharge of a contract by mutual agreement are dealt within sections 62 and 63 as discussed below: a. Novation it takes place when (i) a new contract is substituted for an existing one between the same parties, or (ii) a contract between two parties is rescinded in consideration of a new contract being entered into on the same terms between one of the parties and a third party. Example: A owes B Rs 10,000/. A enters into an agreement with B and gives B a mortgage of his (As) estate for Rs 5,000/ in place of the debt of Rs.10, 000/. This is a new contract which extinguishes the old one. Novation should take place before expiry of the time of the performance of the original contract. b. Rescission- Rescission of a contract takes place when all or some of the terms of the contract are cancelled. It may occur: (i) by mutual consent of the parties, or (ii) where one party fails in the performance of his obligation. In such a case, the other party may rescind the contract without prejudice to his right to claim compensation for the breach of contract. Example: A promises to supply certain goods to B six months after date. By that time, the goods go out of fashion. A and B may rescind the contract. c. Alteration- Alteration of a contract may take place when one or more of the terms of the contract is / or altered by the mutual consent of the parties to the contract. In such a case, the old contract is discharged. Example: A enters into a contract with B for the supply of 100 bales of cotton at his godown by the first of the next month. A and B may alter the terms of the contract by mutual consent.
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d. Remission- Remission means acceptance of a lesser fulfillment of the promise made i.e., acceptance of a lesser sum than, what was contracted for, in discharge of the whole of the debt. It is not necessary that there must be some consideration for the remission of the part of the debt [Harichand Madangopal Vs State of Punjab, A.I.R. (1973 S.C.381]. Example: A owes B Rs.5000/. A pays to B and B accepts in satisfaction of the whole debt, Rs.2000/ paid at the time and place at which Rs. 5000/ is payable. The whole debt is discharged. e. Waiver - waiver takes place, when the parties to the contract agree that they shall no longer be bound by the contract. This amounts to a mutual abandonment of rights by the parties to the contract. Consideration is not necessary for waiver. f. Merger - Merger takes place if an inferior right accruing to a party under a contract merges into a superior right accruing to the same party under the same or some other contract. Example: P holds a property under a lease. He later buys the property. His rights as a lessee is merged into his rights as an owner. 3. Impossibility If an agreement contains an undertaking to perform impossibility, it is void ab initio. It falls into two categories they are: 1. Impossibility existing at the time of agreement. The facts of impossibility may be (i) known to the parties, also called as absolute impossibility. (ii) Unknown to the parties by the ignorance or any other reason. 2. Impossibility arising subsequent to the formation of contract. It is also called as post contractual or supervening impossibility like destruction of subject matter, non-existence or non-occurrence of a particular state of things, death or incapacity for personal service, change of law or stepping in of a person with statutory authority or outbreak of war. 3. Impossibility of performance- not an excuse- a contract is not discharged on the ground of supervening impossibility like difficulty of performance, commercial impossibility, impossibility due to failure of a third person, strikes, lock-out and civil disturbances and failure of one of the objects. 4. Lapse of time If the contract is not performed in time, then the contract will be considered as discharged. 5. Operation of law This includes discharge by death, by merger, by insolvency, by unauthorized alteration of the agreement and rights and liabilities become vested in the same person.
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6. Breach of contract Breach of contract means a breaking of the obligation which a contract imposes. It confers a right of action for damages on the injured party. Breach of contract may take place by (i) actual breach of contract which takes place when the performance is due, during the performance of the contract. (ii) anticipatory breach of contract. 1.3.7 Remedies for Breach of Contract A remedy is the means given by law for the enforcement of a right. When a contract is broken the injured party is entitled to the following remedies according to the law: 1. Rescission of the contract. 2. Suit for damages. 3. Suit upon quantum meruit. 4. Suit for specific performance of the contract. 5. Suit for injunction. The above said remedies are explained as follows: 1. Rescission When a contract is not performed by one party, the other party may sue to treat the contract as rescinded and refuse further performance. In such a case, he is absolved of all his obligations under the contract. Example: A promises B to supply ten bags of cement on a certain day, B agrees to pay the price after the receipt of the goods. A does not supply the goods. B is discharged from liability to pay the price. 2. Damages Damages are a monetary compensation allowed to the injured party by the court for the loss or injury suffered by him by the breach of the contract. The object of awarding damages for the breach of a contract is to put the injured party to the same (original) position. This is called the doctrine of restitution. The foundation of modern law of damages both in India and England, is to be found in the judgment in the case of Hadley Vs Baxendale, (1854) 9 EX.341. The rules relating to damages may now be considered as follows: i. Damages arising naturally-ordinary damages When the damages are proximate consequence occurred by natural and direct by the usual course of things then it is called as ordinary damages. ii. Damages in contemplation of the parties- special damages Any damage arising as other than the reason of normal damage then it will be considered as special damages but special damages cannot be claimed as a matter of right.
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iii. Vindictive or exemplary damages This damage can be given away as compensation for the loss suffered and not by way of punishment for wrong inflicted, but in case of breach of a promise to dishonor of a cheque by a banker wrongfully when he possesses sufficient funds to the credit of the customer, the court may award exemplary damages. iv. Nominal damages Even though the injured party has not in fact suffered any loss by reason of the breach of a contract, the damages recoverable by him are nominal. These damages merely acknowledge that the plaintiff has proved his case and won. [Brace Vs Calder (1895) 2 Q.B.253] v. Damages for loss of reputation vi. Damages for inconvenience and discomfort vii. Mitigation of damages viii. Difficulty of assessment Although damages, which are incapable of assessment, cannot be recovered, the fact that they are difficult to assess with certainty or precision does not prevent the aggrieved party from recovering them. ix. Costs of decree-In addition to the damages, the aggrieved party is entitled to get the cost of getting the decree for damages. The cost of suit for damages is at the discretion of the court. x. Damages agreed upon in advance in case of breach - Liquidated Damages If a sum is named in a contract as the amount to be paid in case of its breach, or if the contract contains any other stipulation by way of a penalty for failure to perform the obligations, the aggrieved party is entitled to receive from the party, who has broken the contract, a reasonable compensation not exceeding the amount so named. This is known as Liquidated Damages. 3. Quantum merit It means as much as earned. This claim arises when one party partly performs, has become discharged by the breach of the contract by the other party. 4. Specific Performance In certain cases of breach of a contract, damages are not in adequate remedy. In such cases the court may direct the party in breach to carry out his promise according to the terms of the contract. In some cases, specific performance will not be granted where (i) damages are in or as adequate remedy (ii) the contract is not certain (iii) the contract in its nature revocable (iv) the contract is made by the trustees in breach of their trust (v) the contract is of a personal nature (vi) the contract is made up by a company in excess of its power as laid down in its memorandum of association (vii) the court cannot supervise the procedure that is being carried out during the time.
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5. Injunction Where a party is in breach of a negative term of a contract, the court may issue an order, restraning him from doing what he has promised not to do. Such an order of the court is known as injunction. 1.3.8 Quasi Contract Sometimes obligations are created by law whereby an obligation is imposed on a party and an action is allowed to be brought by another party. These obligations are known as Quasi-contracts. 1) A supplied B, a minor and / or the wife and children of B with necessaries suitable to his / their condition of life. A is entitled to be reimbursed from Bs property 2) A is a tradesman; leaves goods at Bs house by mistake. B treats the goods as his own. B is bound to pay A for them. The Quasi-contract - Discuussion : 1. Supply of necessaries-if a person, incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another with necessaries suited to his condition of life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. Example; A supplies B, a lunatic, with necessaries suitable to his condition of life. A is entitled to be reimbursed from Bs property. 2. Payment by an interested person- 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. Example; P left his carriage on Ds premises. Ds landlord seized the carriage as distress for rent. P paid the rent to obtain the release of his carriage. Held: P could recover the amount from D [ Exail v. Patridge, (1799) 8 Term 308]. 3. Obligation to pay for non-gratuitous acts-When a person lawfully does anything to another person or delivers anything to him, not intending to do so gratuitously and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or restore, the thing so done or delivered. Example: A, a tradesman, leaves goods at Bs house by mistake. B treats the goods as his own. Then B is bound to pay for them to A. 4. Responsibility of Finder of Lost goods A person, who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee. He is bound to take as much care of the goods as a man of ordinary prudence would, under similar circumstances, should take care as of his own goods of the same bulk, quality and value. Examples: F picks up a diamond on the floor of Ss shop. He hands it over to S to keep it till true owner is found . No one appears to claims it for quite some weeks in spite of the wide advertisements in
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5.
1. 2. 3. 4. 5.
the newspapers. F claims the diamond from S who refuses to return. S is bound to return the diamond to F, who is entitled to retain the diamond against the whole world except the true owner. Mistake or coercion A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it to the person who paid it by mistake or under coercion. Examples: A and B jointly owe Rs.100 to C. A alone pays the amount to C, and B, not knowing this fact, pays Rs.100 over again to C, C is bound to pay the amount to B. Have you under stood Questions? A- Objective questions A is engaged by B to write a book to be published sequentially in a weekly magazine. The magazine is abandoned after a few issues. Is there a quantum merit is in this case? The goods belonging to A are wrongfully attached in order to realize arrears of Government revenue due by B. A pays the amount to save the goods from sale. Is he entitled to recover the amount from B? X saves Ys property from fire intending to do so gratuitously. Subsequently he claims compensation from Y on the ground that Y enjoyed the benefit of Xs act. Will he succeed? A left his carriage on Bs premises. Bs landlord seized the carriage as distress for rent. A paid the rent to obtain the release of his carriage. Can A recover the amount from B? A pays some money to B by mistake. It is really due to C. Can C recover the amount from B? 2. Yes 3. No 4.Yes 5.No
Answers: 1. Yes B-Short questions Q.1.3.a. What is contract? Q.1.3.b. Distinguish between void and voidable contracts. Q.1.3.c. Write a short note on Minors contract for necessities. Q.1.3.d. What is undue influence? State its legal effect. Q.1.3.e. Distinguish between general and specific offer. Q1.3.f. What is quasi-contract? B- Long questions Q.1.3.g. State the essential elements of a valid contract. Q.1.3.h. Discuss the law relating to competency of parties to enter into a valid contract. Q.1.3.i. State whether all void agreements are illegal. Q.1.3.j. Discuss about the essentials of discharge of contracts. Q.1.3.k. Explain briefly. (a) Stranger to a contract (b) Offer and invitation to offer (c) An agreement without consideration
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Q.1.3.l .State whether a contract is valid even if there is no proper communication of acceptance. Q.1.3.m. Discuss the role of offer and acceptance in the formation of a valid contract. 1.4 The Sale of Goods Act 1930 A contract of sale of goods is a contract, whereby the seller transfers or agrees to transfer the property in the goods to the buyer for a price. There may be a contract of sale between one part-owner and another. A contract of sale may be absolute or conditional. The term contract of sale is a generic term and includes both a sale and an agreement to sell 1.4.1 Sales Contract 1.4.1.1 Definitions Sale: A contract of sale of goods is a contract whereby the seller transfer or agrees to transfer the property in goods to the buyer for a price. 1. There must be at least 2 parties. 2. Transfer or agreement to transfer the ownership of goods should take place. 3. Subject matter: Goods. 4. Consideration: Price. 5. May be absolute or conditional. 6. All other essentials of a valid contract must be present. Example for Sale: A sells his Yamaha Motor Bicycle to B for Rs.10,000 Ownership has been transferred from A to B. Agreement to Sell: A agrees to sell certain goods to B. The goods are on the way from London to Mumbai in a ship. Property of the goods will pass to the buyer when the goods come to the port; the agreement is subject to the condition that the ship arrives in the port with goods. Sale and Hire - Purchase : Hire Purchase Agreement for hire with an option to purchase. Hirer will become owner of the good on the payment of last instalment of hire charges. Owner can terminate the contract. Instalment sale & Hire Purchase are different In Hire purchase, hirer has option to purchase. In Installment sale buyer has bought or agreed to buy the goods.
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1.4.1.2 Difference between sale and agreement to sell

SL. NO. 1. 2. SALE Executed Contract Seller can sue the buyer for price of goods. AGREEMENT TO SELL Executory Contract Seller can only sue for damages with reference to the price that was payable at a stated date. 3. In case of loss of goods, the loss will fall on Loss to be owned by the seller even if the buyer, even if goods are in possession of goods are in possession of the buyer. seller. Risk is associated with the ownership. 4. In case buyer pays the price & the seller thereafter becomes an insolvent, the buyer can claim the goods from official receiver or assignee. 5. Buyer recovers in solvent without paying the price; the seller will have to deliver the goods to official assignee or receiver except where he has lien on the goods. Seller can refuse to deliver the goods to the official assignee or receiver. Buyer cannot claim the goods, but only rateable dividend for the price paid
What is called as goods? Goods-Every kind of moveable property other than actionable claims and money

Money itself (legal tender) cannot be the subject for sale. Foreign Currency may however be bought or sold.
Actionable Claim: Things which a person cannot make use of but which can be claimed by him by means of legal action of a debt. 1.4.2 Transfer of title and risk of loss A document of title to goods is one, which enables its possessor to deal with the goods described in it as if he were the owner; it is used in the ordinary course of business as proof of the possession or control of goods. It authorizes, either by endorsement or by the delivery, its possessor to transfer or receive goods by it. It symbolizes the goods and confers a right on the purchaser to receive the goods or to further transfer such right to another person. This may be done by mere delivery or by proper endorsement and delivery. Conditions to be fulfilled by a document of title of goods: i) It must be used in the ordinary course of business ii) The undertaking to deliver the goods to the possessor of the document must be unconditional.
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iii) The possessor of the document, by virtue of holding such document, must be entitled to receive the goods unconditionally. Here we will discuss some of the documents of titles as given below: 1.4.2.1 Document of title of Goods: The goods can be called as goods based on the below said form of titles: 1. Bill of lading - It is the document which acknowledges receipt of goods on board a ship and is signed by the captain of the ship or his duly authorized representative. 2. Dock warrant-It is a document issued by a dock owner, giving details of the goods and certifying that the goods are held to the order of the person named in it or endorsee. It authorizes the person holding it to receive possession of the goods. 3. Warehouse keepers certificate/Harbingers certificate -It is a document issued by a warehouse-keeper or a wharfinger stating that the goods specified in the document are in his warehouse or in his wharf. 5. Railway or lorry receipt - It is a document issued by a railway for acknowledging the receipt of goods. It is to be presented by the holder or consignee at the destination to take delivery of the goods. 6. Warrant/Order for the delivery of goods-It is a document containing an order by the owner of the goods to the holder of the goods on his behalf, asking him to deliver the goods to the person named in the document. 1.4.1.2 Transfer of property Transfer of property in goods from the seller to the buyer is the main object of a contract of sale. The term property in goods must be distinguished from possession of goods. Property in goods means the ownership of goods, whereas possession of goods refers to the custody or control of goods. An article may belong to A, although it may not be in his possession. B may be in possession of that article though he is not its owner. It is important to know the precise moment of time at which the property in goods passes from the seller to the buyer for the following reasons: i) Risk follows ownership- Unless otherwise agreed, risk follows ownership whether delivery has been made or not and whether price has been paid or not. ii) Action against third parties- When the goods are in any way damaged or destroyed by the action of third parties, it is only the owner of the goods who can take action against them. iii) Insolvency of the seller or the buyer- In the event of insolvency of either the seller or the buyer, the question whether the official receiver or assignee can take over the goods or not depends on whether the property in the goods has passed from the seller to the buyer. iv) Suit for price- The seller can sue for the price, unless otherwise agreed only if the goods have become the property of the buyer.
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1.4.2.3 Passing of Property The primary rules for ascertaining, when the property in goods passes to the buyer is as follows; i) Goods must be ascertained- When there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained. ii) Intention of the parties- Where there is a contract for the sale of specific or ascertained goods, the property in them passes to the buyer at the time when the parties intend it to pass. Transfer of property based on the classification of goods: 1. Existing a) Specific and ascertained The rules relating to transfer of property in specific goods are as follows: i) Passing of property at the time of contract- Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made. ii) Passing of property delayed beyond the date of the contracta) Goods not in a deliverable state. - Where there is a contract for the sale of specific goods not in a deliverable state. b) When the price of goods is to be ascertained by weighing.-Where there is a contract for the sale of specific goods in a deliverable state, but the seller is bound to weigh, measure, test or do some other act or thing with reference to the goods for the purpose of ascertaining the price, the property does not pass until such act or thing is done and the buyer has notice thereof. 2. Generic and unascertained- When there is a contract for the sale of unascertained goods, the property in the goods does not pass to the buyer until the goods are ascertained. Until goods are ascertained there is merely an agreement to sell. 1. Future Goods 2. Contingent Goods Example: A owns an Indica car show room of 50 cars and agrees to sell any one of them to the contract is for unascertained goods. Since which particular car shall become the subject matter of sale is not individualized at the time of the contract of sale. An agreement to sell future crops of a particular field implies an agreement to sell future goods. A agree to sell to B a certain painting, only if C, its present owner sells it to A. This painting is classified as contingent goods. 3. Goods sent on approval or on sale or return- When goods are delivered to the buyer on approval or on sale or return or other similar terms, the property therein passes to the buyer; i) When he signifies his approval or acceptance to the seller. ii) When he does any other act adopting the transaction.
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iii) If he does not signify his approval to the seller but retains the goods without giving notice of rejection, beyond the time fixed for the return of the goods, or if no time has been fixed, beyond a reasonable time. 1.4.2.4. Contracts involving sea routes There are certain special clauses and conditions for the transfer of property through the sea and these are follows; 1. F.A.S. contracts- Free alongside ship. The property in goods sold under an F.A.S. contract passes from the seller to the buyer when the goods delivered alongside the ship. The sold goods will be named by the buyer under a contract of carriage. Sellers duties under F.A.S are as follows: i) To deliver the goods by alongside the ship. ii) To notify the buyer immediately that the goods have been delivered alongside the ship. iii) To pay all charges and to bear all risks on the goods delivered alongside the ship. 2. F.O.B. contracts- Free On Board. Seller sends the goods on a ship at his selling point at his own expense under a contract by sea, to be made by or on behalf of the buyer, for the purpose of transmission to the buyer. Sellers duties under F.O.B are i) To deliver the goods on board the ship, the name of the buyer will be documented. When once the goods are put on board the ship, they are at the risk of the seller. ii) To give notice of the shipment to the buyer so as to enable him to protect himself by insurance against loss during the sea transit. Buyers duties under F.O.B Contract i) To arrange for the contract of affreightment ii) To name the ship to which the goods are to be delivered or to authorize the seller to select the ship C.I.F. contracts- Cost Insurance and Freight contract - It is a contract performed by the delivery of documents representing the goods to the buyer, through a bank. Price as influencing factors in sale of goods Money consideration for sale of the goods: Price may be either fixed by the contract. May be agreed to be fixed in a manner provided by the contract. e.g., by a value. May be determined by the course of dealing between the parties. 1.4.3 Conditions and Warranties in sales contract A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty.
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Difference between a condition and warranty

SL. CONDITION NO. 1. A condition is a stipulation (in a contract) which is essential to the main purpose of the contract 2. A breach of condition gives the aggrieved party a right to sue for damages as well as the right to repudiate the contract 3. A breach of condition may be treated as a breach of warranty in certain circumstances A warranty is a stipu lation which is only collateral or subsidiary to the main purpose of the contract A breach of warranty gives only the right to use for damages. The contract cannot be repudiated A breach of warranty cannot be treated as a breach of condition WARRANTY
Condition: A condition is a stipulation which is essential to the main purpose of the contract. It goes to the root of the contract. Warranty: A warranty is a stipulation which is collateral to the main purpose of the contract. It is not of such vital importance as a condition. Example: A man buys a particular horse, which is warranted to ride. If the horse turns out to be vicious, the buyers only remedy is to claim damages. But if instead of buying a particular horse, asks a dealer to supply him with a quiet horse and the horse turn out to be vicious, the stipulation is a condition and the buyer can reject the horse or keep the horse and claim damages. When can the condition be treated as a warranty?

A breach of condition can be treated as a beach of warranty under certain conditions. A breach of warranty cannot be treated as a breach of condition.
Contract of guarantee A contact to perform the promise or discharge of liability of a third person in case of default. The person who gives the guarantee is called the Surety. The person for whom the guarantee is given is called as principal debtor. The person to whom the guarantee is given is called the as creditor. Two contacts Principal contract between the principal debtor and creditor . - Secondary contract between the creditor and the surety. Example: when A requests B to lend Rs.10, 000 to C, that C will repay the amount within the agreed time and that C failing to do so, A himself will pay to B. In this case there is a contract of guarantee.
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Express and implied conditions and warranties In a contract of sale of goods, conditions and warranties may be expressed or implied. Express conditions and warranties are those which are expressly provided in the contract. Implied conditions and warranties are those which the law implies into the contract unless the parties stipulate to the contrary. Express condition: If the terms of contract expressly provide for them. Implied conditions 1. Condition as to title- In a contract of sale, unless the circumstances of the contract are such as to show a different intention, there is an implied condition on the seller that is : a) in the case of a sale, he has the right to sell the goods and b) in the case of an agreement to sell, he will have the right to sell the goods at the time when the property is to be passed Example: R bought a car from D and used it for four months. D had no title to the car and consequently R had to hand it over to the true owner. Held: R could recover the price paid. [Rowland v. Divail, (1923) 2 K.B. 500] 2. Sale by description Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description. Example; A ship was contracted to be sold as a copper fastened vessel to be taken with all faults, without any allowance for any defects whatsoever. The ship turned out to be partially copperfastened. Held: The buyer was entitled to reject [Sheperd v. Kain, (1821) 5 B & add.240 3. Conditions as to fitness or quality - Normally, in a contract of sale there is no implied condition as to quality or fitness of the goods for a particular purpose. The buyer must examine the goods thoroughly before he buys them in order to satisfy himself that the goods will be suitable for the purpose for which he is buying them. 4. Goods to be of merchantable quality- Where goods are bought by description from a seller who deals in goods of that description, there is an implied condition that the goods are of merchantable quality. This means that goods should be such that they are commercially saleable under the description by which they are known in the market at their full value. Example: A manufacturer supplied 600 horns under a contract. The horns were found to be dented, scratched and otherwise and therefore the sellers suit for price was dismissed {Jackson v. Rotax Motor & Cycle Co. (1910) @ k.B.397} 5. Condition implied by custom or trade -An implied condition as to quality or fitness for a particular purpose may be annexed by the usage of trade. Example: A bought a set of false teeth from a dentist. The set did not
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fit into As mouth. Held- He could reject the set as the purpose for which anybody would buy it was implicitly known to the seller, i.e., dentist {Dr.Baretto v.T.R.Price, A.I.R. (1939) Nag. 19} 6. In case of sale by sample, the (a) Bulk to correspond with sample (b) Buyer to have reasonable opportunity to compare the bulk with sample (c) Goods to be of merchantable quality Implied warranties The implied warranties in a contract of sale are as follows: 1. Warranty of quite possession-In a contract of sale; unless there is a contrary intention, there is an implied warranty that the buyer shall have and enjoy quiet possession of the goods. If the buyer is in any way disturbed in the enjoyment of the goods in consequence of the sellers defective title to sell, he can claim damages from the seller. 2. Warranty of freedom from encumbrances- In a contract of sale; unless there is a contrary intention, there is an implied warranty that the buyer shall have freedom from any encumbrance of the goods obtained from the seller. 1.4.4 Performance of sales contracts Performance of a contract of sale means as regards the seller, deliver the goods to the buyer and as regards the buyer, acceptance of the delivery of the goods and payment for them, in accordance with the terms of the contracts of sale. A contract of sale always involves reciprocal promises, the seller promising to deliver the goods and the buyer promising to accept and pay for them. In the absence of a contract to the contrary they are to be performed simultaneously and each party should be ready and willing to perform his promise before he can call upon the other to perform his promise. 1.4.4.1Delivery of Goods Delivery means voluntary transfer of possession of goods from one person to another. Delivery of goods sold may be made by doing anything, which if the parties agrees shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer. Delivery of the goods may be actual, symbolic, or constructive. This is explained as follows: 1. Actual delivery-Where the goods are handed over by the seller to the buyer or his duly authorized agent, the delivery is said to be actual. Delivery of goods may also be made by doing anything which has the effect of putting the goods in the possession of the buyer.
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2. Symbolic delivery- Where the goods are ponderous or bulky and incapable of actual delivery, i.e., haystack in a meadow, the delivery may be symbolic. Handing over of the key of a warehouse to the buyer is symbolic delivery of the goods to the buyer and is as effective as the actual delivery, eventhough there is no change in the possession of the goods. 3. Constructive delivery- Where a third person who is in possession of the goods of the seller at the time of the sale, acknowledges to the buyer that he holds the goods on his behalf and and there takes place a delivery by the attainment or the constructive delivery. 1.4.4.2 Rules as to delivery of goods a) b) c) d) e) f) g) h) i) j) Mode of delivery Delivery and payment Effect of part delivery Buyer to apply for delivery Place of delivery Time of delivery Goods in possession of a third party Cost of delivery Delivery of correct quantity Delivery to a carrier or wharfinger
1.4.4.3 Acceptance of delivery Receipt of goods by the buyer does not necessarily result in acceptance of goods by him under and in performance of the contract of sale. Acceptance is something of mere receipt or taking possession of the goods by the buyer. It means the final assent by the buyer that he has received the goods under and in performance of the contract of sale. If he wrongfully refuses to accept the goods under the contract, he is liable for damages. The buyer is deemed to have accepted the goodsa) when he intimates to the seller that he has accepted the goods, b) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller. 1.4.4.4 Rights and duties of the buyer Rights of the buyer a) Right to have delivery as per contract b) Right to reject the goods c) Right to repudiate d) Right to notice of insurance e) Right to examine f) Rights against the seller for breach of the contract
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1.4.4.5 Duties of the buyer a) Duty to accept the goods and pay for them in exchange for possession b) Duty to apply for delivery c) Duty to demand delivery at a reasonable time d) Duty to accept instalment delivery and pay for it e) Duty to take risk of deterioration in the course of transit f) Duty to intimate the seller when he rejects the goods g) Duty to take delivery h) Duty to pay price i) Duty to pay damages for non acceptance 1.4.5 Unpaid seller A seller of goods is deemed to be an unpaid seller when: 1. the whole of the price has not been paid or tendered, 2. a bill of exchange or other negotiable instrument has been received as a conditional payment and the condition on which it is received has not been fulfilled by the reason of dishonor of the instrument or other wise. The following conditions must be fulfilled before a seller of goods can be deemed to be an unpaid seller: 1. He must be unpaid and the price is due. 2. He must have an immediate right of action for the price 3. A bill of exchange or other negotiable instrument was received but the same has been dishonored. 1.4.5.1 Rights of an unpaid seller against the goods When the property in the form of goods has passed to the buyer, an unpaid seller has the following rights against the goods. They are 1. Right to lien- A lien is a right to retain possession of goods until payment of the price is made available to the unpaid seller of the goods, who is in possession of them wherea) The goods have been sold without any stipulation as to credit, b) The goods have been sold on credit, but the term of credit has expired, c) The buyer becomes insolvent. 2. Right of stoppage in transit- The right of stoppage in transit is a right of stopping the goods in transit after the unpaid seller has parted with the possession of the goods. He has further right of resuming possession of the goods as long as they are in the course of transit and retaining possession until payment or tender of the price is available to the unpaid sellerAnna Universtiy Chennai
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when the buyer becomes insolvent when the goods are in transit Right of resale- The unpaid seller can resell the goodswhere the goods are of a perishable nature where he gives notice to the buyer of his intention to re-sell the goods and the buyer does not within a reasonable time pay or tender the price. 1.4.5.2 Remedies for breach of contract of sale 1. Buyers suits a) Suit for damages for non-delivery of the goods b) Suit for breach of warranty c) Suit for damages for repudiation of contract by the seller before the due date d) Suit for specific performance e) Suit for interest Sellers suits Suit for price Suit for damages for non-acceptance of the goods Suit for damages for repudiation of contract by the buyer before the due date d) Suit for interest 1.4.5.3 Unascertained or future goods Property is not transferred to the buyer unless and until the goods are ascertained. In case of the sale of unascertained goods or future goods by description, property passes to the buyer, when goods of that description in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller. 1.4.5.4 Sale on approval or Sale or return basis Where goods are delivered to the buyer on approval or a sale or return or similar terms, the property passes to the buyer: When A signifies his approval or acceptance to the seller B. The seller B does any act adopting the transaction e.g., pledges the goods with a third party or B retains the good, without giving notice of rejection, beyond the time fixed for the return of goods or if the time is fixed, beyond a reasonable time. 1.4.5.5 Transfer of title by non-owners Owner only can transfer a good title. Exceptions 1. When effected by a mercantile agent in the ordinary course of business, 2. When made by a joint owner in possession with the consent of other joint owners.
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a) b) 3. a) b)
2. a) b) c)
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1.4.5.6 Rights of an indemnifier It is the awareness of the entitled benefit of all securities to which the creditor has against the principal debtor are known or not. Commencement of the indemnifiers liability The indemnified may compel the indemnifier to place links in a position to meet the liability that may be cast upon him without waiting until the promise (the indemnified) has actually discharged it. 1.4.5.7 Specific guarantee A guarantee of the repayment of a loan of Rs. 10,000 to B by C (banker) 1.4.5. 8 Continuing guarantee
Eg:1 A in consideration that B will employ C in collecting the rents of Bs property, promises to B to be responsible to the amount of Rs. 5000/ - for the due collection and payment of these rents. Eg:2 A guarantees payment to B, a tea dealer, to the amount of Rs. 10,000 for any tea selling from time to time supplied to C. B supplies C with tea to the value of Rs. 10,000 and C pays B for it. Afterwards B suppli es C with tea to the value of Rs. 15,000, C fails to pay. The guarantee given by A was a continuing guarantee and he is accordingly liable to B to the extent of Rs. 10,000.
1.4.5.9 Rights and obligations of the creditor The Rights of a creditor are: 1. The creditor is entitled to demand payment, from the surety as soon as the principal debtor refuses to pay or makes default in payment. 2. Where surety is insolvent, the creditor is entitled to proceed on the suretys insolvency and claim the pro- rata dividend. Obligations 1. Not to change any terms of the original contracts. 2. Not to release or discharge the principal debtor. 3. Not to compound or give time to or agree not to sue the principal debtor. 4. Not to do any act inconsistent with the rights of the surety.
Rights against the creditor RIGHTS OF SURETY Rights against co-sureties Rights against the principal debtor
1.4.5.10(a) Rights against the creditor (a) Right of subrogation Where a surety has paid the guaranteed debts on its becoming due or
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has performed the guaranteed duty on the default of the principal debtor, he is invested with all the rights which the creditor has against the debtor. (b) Right to be indemnified Surety has the right to recover from the principal debtor, the amounts which he has rightfully paid under the contract of guarantee. 1.4.5.10(b) Rights against co-sureties Rights of contribution where a debt has been guaranteed by one or more than one person, they are called co-sureties. Example: A, B and C are sureties to D for a sum of Rs. 3000, which has to be paid to E. If D defaults in making payment to E., then A, B and C are liable as between themselves to pay Rs. 1000 each and if any of them has to pay his share i.e. Rs. 1000, he can claim contribution from others for the amount paid in excess of Rs. 1000. If one of the sureties become insolvent, the solvent constitutes shall have to contribute the whole amount equally. Example: A, B and C are sureties for D; enter into a contract to contribute each in a different penalty. A in the penalty of Rs. 10,000, B in that of Rs. 20,000, C in that of Rs. 40,000, conditioned for Ds duly accounting to E. D makes default to be extent of Rs. 30,000. A, B & C are each liable to pay Rs. 10,000. In the example above, if D makes default to the extent of Rs. 40,000, A is liable to pay Rs. 10,000, B & C Rs. 15,000 each liabilities of surety. The liability of the surety is co-extensive with that of the Principal Debtor. (The surety is liable for all those amounts which the principal debtor is liable for). Surety is discharged 1. 2. 3. 4. 5. by the notice of revocation (As to future transactions), by the death of surety, by the variance of the terms of contract, by the release or discharge of principal debtor, by compounding with or giving time to or agreeing not to the principal debtor, 6. by creditors act or omission impairing surety eventually, 7. loss of or parting with security given by the principal debtor to the creditor. 1.4.5.11 Finder of Lost Goods Rights: 1. Right to retain the goods. 2. Right to sell: - If the owner cannot with reasonable diligence be found or if he refuses upon demand to pay the lawful charges of the finder, the finder can sell it.
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(i) when the thing is in danger of perishing or the greater part of its value. (ii) when the lawful charges of the finder in respect of the thing found amounts to 2/3rd of its value. 1.4.5.12 Doctrine of caveat emptor Let the Buyer Beware It is not part of the sellers duty to point out defects of his own goods. The buyer must inspect the goods to find out if they will suit his purpose. Exceptions: 1. Where the seller makes a false representation and the buyer relies on that representation. 2. Seller actively conceals a defect in the goods, so that on a reasonable examination the same could not be discovered. 3. Buyer makes known to the seller, the purpose for which he is buying the goods and the seller should know to sell the goods of that description. Have you understood ? Objective questions: 1. A sold 100 quintals of groundnut oil to B. Before he could deliver to B, the Government of India requisitioned the whole quantity lying with A in public interest. B wants to sue A for breach of contract. Is the contract void? 2. A agrees to sell a horse to B who tells A that he (B) needs the horse for riding to Mumbai immediately. The horse is ill at the time of agreement. What are the rights of A and B? 3. A contracts with B to buy 50 easy chairs of a certain quality. B delivers 25 chairs of the type agreed upon and 25 chairs of some other type. What are the rights of A? 4. A contracts with B to purchase 30 tons of apple juice. B crushes the apples, put the juice in containers and keeps it ready for delivery. A delay to take delivery and the juice goes damaged and has to be thrown away. Is liable to pay the price? 5. At a sale by auction without reserve, the auctioneer is instructed not to sell for less than a certain price. The auctioneer accepts the highest bonafide bid which, however, is lower than the reserved price. Is the sale valid? Answers: 1. Void 2. Void 3. May accept the order, may reject the other 4.Yes 5.Yes Short questions: Q.1.4.a. Define the term goods Q.1.4.b. What are the different types of goods? Q.1.4.c. Distinguish between the sale and hire purchase.
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Q.1.4.d. What is implied warranty? Q.1.4.e. What is F.O.B. contract? Q.1.4.f. When is a seller of goods deemed to be an unpaid seller? Extended Questions: Q.1.4.g. Explain the nature of a contract of sale of goods and bring out clearly the distinction between a sale and an agreement to sell. Q.1.4.h. Briefly explain the conditions and warranties implied by the law in a contract for the sale of goods. Q.1.4.i. State the doctrine of caveat emptor and the exceptions to it. Q.1.4.j.Explain what is meant by the reservation of the right of disposal in a contract for the sale of goods Q.1.4.k. What remedies are open to a buyer for a breach of contract by the seller? What are his liabilities for rejecting or refusing the delivery of goods? Q.1.4.l. Distinguish between an unpaid sellerss right of lien and the right of stoppage in transit. When can he resell the goods? 1.5 Negotiable Instruments Act 1881 Introduction:Negotiable means transferable from one person to another person. Instrument means Any written document by which a right is created in favor of some person. The Reserve Bank of India Act, 1934
Sec 31: No person (other than RBI or the Central Government) can draw, accept, make or issue any bill of exchange or promissory note payable to the bearer on demand. No person (other than RBI or Central Government can make or issue any promissory note payable to the bearer of the instrument.
Definition of a Negotiable Instrument A Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer (Section 13) An instrument may be negotiable either by (1) Statute or (2) by usage. Promissory note, bill of exchange, Cheque By statute; Bank notes, Bank drafts, share warrants, bearer instruments, dividend warrants, scripts and treasury bills by usage. 1.5.1 Nature and requisites of negotiable instruments 1.5.1.1 Features of Negotiable instruments (1) Freely transferable By delivery or by endorsement and delivery. (2) Holders title free from defect Holder in due course acquires a goods title not withstanding any defect in a previous holder title.
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A holder in due course is one who receives the instrument for value and without any notice as to the defect in the title of the transferor. (3) The holder can sue in his own name. (4) Can be transferred any number of times (Infinity) till its maturity. (5) It is subject to certain presumptions. 1.5.1.2 Presumptions / Requisites :- (section 118 & 119) 1. As to consideration : Every negotiable instrument is deemed to have been made, drawn, accepted, endorsed, negotiated or transferred or transformed for consideration (Marimuthu Kounder Vs Radakrishnan and other AIR 1991, Kerala 39) 2. As to date: Every negotiable instrument bears the date on which it is made or drawn. 3. As to acceptance: Every bill of exchange is accepted within a reasonable time after the date mentioned therein and before the date of its maturity. 4. As to transfer: Transfer is made before the date of maturity, in the case of an instrument payable, otherwise than on demand. 5. As to the order of endorsement: The endorsement appearing on it are made in the order in which it appears. 6. As to lost instruments: Where an instrument has been lost or destroyed, that it was duly stamped and the stamp was duly cancelled. 7. As to the holder in due course: The holder of the instrument is a holder in due course. 8. As to dishonour: Court shall on the proof of protest, presume the fact of dishonour unless it is disproved. 1.5.2 Transfer of negotiable instruments and liability of parties One of the essential characteristics of a negotiable instrument is that it is freely transferable from one person to another person. This transfer may take place either: 1. by negotiation 2. by presentment 1. Transfer by negotiation- When a promissory note, bill of exchange or cheque is transferred by one party to another, so as to constitute the transferee the holder thereof, the instrument is said to be negotiated. There are two methods of transfer by negotiation, namely, a) Negotiation by delivery- An instrument payable to bearer is negotiable by delivery thereof. Example: A is the holder of negotiable instruments payable to bearer. b) Negotiation by endorsement and delivery - An instrument payable to order is negotiable by the holder by endorsement and delivery thereof. Example: A owes B Rs.1, 000. He makes a promissory note for the amount payable to B. He dies and the note is afterwards found among his papers and delivered to B. B cannot sue upon the note if delivered to him.
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2. Transfer by assignment- When a person transfers his right to receive the payment of a debt, assignment of the debt takes place. Thus where the holder of an instrument transfers it to another, so as to confer a right on the transferee to receive the payment of the instrument, transfer by assignment takes place. Liability of parties The liability of the parties is mentioned below: a) Liability of drawer- The drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonour has been given to or received by the drawer. b) Liability of drawee of cheque- The drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to the payment of such cheque, must pay the cheque when duly required to do so. In default of such payment, the drawee, i.e., the banker must compensate the drawer for any loss or damage caused by such default. c) Liability of maker of note and acceptor of bill- The maker of a promissory note and the acceptor of a bill of exchange are the persons who are primarily liable to pay the amount to the holder on demand. d) Liability of indorser - The indorser of a negotiable instrument before maturity is liable to all subsequent holders in case of dishonour. e) Liability of prior parties to a holder in due course- Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied. f) Acceptors liability on a forged endorsement- An acceptor of a bill of exchange already indorsed is not relieved from liability by reason that such endorsement is forged, if he knew or had reason to believe the endorsement to be when he accepted the bill. g) Acceptors liability for a bill in a fictitious name and payable to the drawers order is not, by reason that such name is fictitious, relieved from liability to any holder in due course claiming under endorsement by the same hand as the drawers signature and purporting to be made by the drawer. 1.5.3 Enforcement of secondary liability Secondary liability the principle of suretyship a) Maker, drawer and acceptor principals- In the absence of contract to a contrary, the maker of a promissory note or cheque, the drawer of a bill of exchange until acceptance, and the acceptor are respectively the parties primarily liable. b) Prior party a principal debtor in respect of each subsequent party- As between the parties liable as sureties, each prior party is in the absence of a contract to the contrary, a principal debtor in respect of each subsequent party. c) Suretyship- When the holder of an accepted bill of exchange enters into any contract with the acceptor which, under sec 134 or 135 of
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the Indian Contract Act, 1872 would discharge the other parties, the holder may expressly reserve his rights to charge the other parties, and in such a case they are not discharged. d) Discharge of endorsers liability- When the holder of a negotiable instrument, without the consent of the indorser, destroys or impairs the endorsers remedy against a prior party, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity. 1.5.4 Holder in due course Holder:- The holder of a promissory note, bill of exchange or cheque means any person entitled in his own name : i) to the possession thereof, and ii) to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction. Holder in due course:-Who for consideration locate the possessor or the payee or the endorsee thereof, if payable to order, before the amount mentioned in it, becomes payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. Holder, in due course, acquires a better title than that of its transferor. Any person is a holder in due course if he fulfils the following conditions; a) That, for consideration, he becomes i) the possessor of the negotiable instrument if payable to bearer, or ii) the payee or endorsee thereof, if payable to order. A holder of a negotiable instrument will not be a holder in due course ifb) he has obtained the instrument by gift or for and unlawful consideration or by some illegal method, c) he has obtained the instrument after its maturity, d) he has not obtained the instrument bona fide. Privileges of a holder in due course The special privileges of a holder in due course are as follows: 1. Inchoate stamped instrument- A person, who has signed and delivered to another person, a stamped but otherwise inchoate instrument, is precluded from asserting, as against a holder in due course, that the instrument has not been filled in accordance with the authority given by him, the stamp being sufficient to cover the amount. 2. Liability of prior parties- Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied. 3. Fictitious payee- where a bill is drawn payable to the drawers order in a fictitious name and is indorsed in the same hand as the drawers signature, the acceptor is not relieved from liability to any holder in due course, on the plea that the drawer is fictitious. 4. Negotiable instrument without consideration- When a negotiable instrument is made, drawn, accepted or transferred without
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5.
6.
7.
8.
9. 10.
11.
consideration, it creates no obligation of payment between the parties to the transaction. An agreement made without consideration is void. But if the negotiable instrument gets into the hands of a holder in due course, he can recover the amount on it from any of the prior parties thereto. Conditional delivery- If a bill or note is negotiated to a holder in due course, the other parties to the instrument cannot avoid liability on the ground that the delivery of the instrument was conditional or for a special purpose only. Instrument cleared of all defects- Once a negotiable instrument passes through the hands of a holder in due course, it gets cleared of its defects provided the holder was himself not a party to the fraud or illegality which affected the instrument in some stage of its journey. Thus any defect in the title of the transferor will not affect the rights of the holder in due course even if he had knowledge of the prior defect provided he himself is not a party to the fraud. Instrument obtained by unlawful means or for unlawful consideration- The person liable to pay on a negotiable instrument cannot, as against a holder in due course, contend that he had lost it, or that it was obtained from him by means of an offence or fraud or for an unlawful consideration. Estoppels against denying original validity of instrument-. The maker of a promissory note, the drawer of a bill of exchange or cheque and the acceptor of a bill of exchange for the honor of the drawer cannot, in a suit thereon by a holder in due course, deny the validity of the instrument as originally made or drawn. Every holder is a holder in due course- The law presumes that every holder is a holder in due course, although the presumption is reputable. Estoppels against denying capacity of payee to indorse- The maker of a promissory note and acceptor of a bill of exchange payable to order cannot, in a suit thereon by a holder in due course, deny the payees capacity at the date of the note or bill, to indorse the same. Endorser not permitted to deny the capacity of prior partiesThe endorser of a negotiable instrument cannot in a suit thereon by a subsequent holder, deny the signature or capacity to contract of any prior party to the instrument.
Promissory note An instrument in writing (not being a bank note of a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument. Example of Promissory Notes (a) I promise to pay B or order Rs. 500 (b) I acknowledge myself to be indebted to B for Rs. 1000 to be paid on demand for value received.
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The following however, are not Promissory Notes a) Mr. B, I.O.V. (I owe you) Rs. 1000 b) I am liable to pay you Rs. 500 c) I promise to pay B Rs. 500 and all other sums which shall be due to him. d) I promise to pay B Rs. 500; first deducting there from any money in be may owe me. e) I promise to pay Rs. 1500 on Ds death, provided be leaves me enough to pay that sum. f) I promise to pay B Rs. 500 seven days after my marriage with C. g) I promise to pay B Rs. 500 and to deliver him my scooter on 1st January 2004. Essential Characteristics of a Promissory Note (1) Should be in writing (2) Promise to pay: We have received a sum of Rs. 9000 from Shri R.R. Sharma. This amount will be repaid on demand. We have received the amount in cash. Use of word promise is not essential to constitute an instrument as Promissory Note. (3) Unconditional (4) Signed by the maker (5) Certain parties (6) Certain sum of money only (7) Promise to pay money only (8) Number, place, date etc usually found If it is undated it is deemed to have been made when it was delivered. (9) May be payable in instalments (10)It may be payable on demand or after a definite period (A demand promissory note becomes times barred on expiry of 3 years from the date it bears) (11)It cannot be made payable to bearer on demand or even payable to bearer after a certain period (sec 31 of RBI Act) (12) It must be duly stamped under the Indian Stamp Act. Specimen of a promissory note
Rs 1000 Chennai 600 025 10th Sept 2006 Six months after date I promise to pay X or order the sum of rupees thousand only for value received . To X Address: ______________ ______________ Stamp Sd/-
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Chennai 600 025 10th Sept 2006
Specimen copy of bill of exchange

Rs 1000
Six months after date pay (PAYEE) to A or orde r the sum of rupees thousand only for value received. To X (Drawee) Address: ______________ ______________ Drawer/Maker B Stamp Sd/Stamp Sd/-
Bill of Exchange: An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument. Unconditional order is essential Please pay Rs. 10,000 to A on demand and oblige - Does not constitute a Bill of Exchange. Usance bill - Payable after a specified period of time At sight bill Payable on demand or payable at sight. Cheque
SPECIMEN ABC BANK Date : _______________ Rs. PAY ________________________ OR BEARER RUPEES _____________________ A/c No. XYZ Bank ABC Branch Chennai 600 xxxx Cheque no. xxxxxxxxxxx Branch Code xxxxxxxxxxxx LF INTLS
Crossing of cheques Payment cannot be claimed across the counter in a crossed cheque. It can only be credited to an account with a bank Type of crossing (1) General (2) Special.
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General Crossing a) Not Negotiable crossing -It is not non-transferable- The cheque having the special feature as these can be no holder in due course. b) A/c Payee Crossing: Drawer intends the payment to be credited to payees account and none else. Special crossing a) Not Negotiable, b) A/c Payee Crossing Who can cross cheque?
Drawer Holder Banker
1.5.5 Discharge of negotiable instruments The term discharge in relation to a negotiable instrument is used in two senses like: 1. Discharge of the instrument 2. Discharge of one or more of the parties from liability thereon An instrument is said to be discharged when all rights of action under it are completely extinguished and when it ceases to be negotiable. This would happen when the party who is ultimately liable on the instrument is discharged from liability. In such a case, even a holder in due course does not acquire any rights under the instruments. If, on the other hand, one or more of the parties is /are discharged from liability, the instrument continues to be negotiable on it. The discharge of one or more of the parties continues to be liable on it. 1. Discharge of an Instrument The different modes of discharge of an instrument are as follows: a) By payment in due course- This is the most obvious and the usual mode of discharge. An instrument is discharged by payment made in due course by the party who is primarily liable to pay, or by a person who is accommodated in case the instrument was made or accepted for his accommodation. The payment of the amount due on the instrument must be made at or after the maturity to the holder of the instrument if the maker or acceptor is to be discharged. A payment by a party who is secondarily liable does not discharge the instrument. Again, any person liable to pay is entitled to have the instrument shown to him before payment. On payment he is entitled to have the instrument delivered up to him. b) By party primarily liable becoming holder- If the maker of a note or the acceptor of a bill becomes its holder at or after its maturity in his own right, the instrument is discharged. c) By express waiver- when the holder of a negotiable instrument at or after its maturity absolutely and unconditionally renounces in writing or gives up his rights against the instrument, the instrument is
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discharged. The remuneration must be in writing unless the instrument is delivered up to the party primarily liable. d) By cancellation- where an instrument is intentionally cancelled by the holder or his agents and the cancellation is apparent thereon, the instrument is discharged. Cancellation may take place by crossing out signatures on the instrument, or by physical destruction of the instrument with intention of putting an end to the liability of the parties to the instrument. e) By discharge as a simple contract- A negotiable instrument may be discharged in the same way as any other contract for the payment of money. This includes, for example discharge of an instrument by novation or rescission or by expiry of period of limitation. 2. Discharge of party or parties A party or parties to a negotiable instrument is/are discharged in any one of the following ways: a) By payment- When payment on an instrument is made in due course, both the instrument and the parties to it are discharged. b) By cancellation- When the holder of a negotiable instrument or his agent cancels the name of a party on the instrument with intent to discharge him, such party and all subsequent parties, who have a right of recourse against the party whose name is cancelled, are discharged from liability to the holder. The subsequent parties are in the position of sureties to the prior party whose name is cancelled and discharge of the principal debtor automatically discharges the sureties. c) By release- Where the holder of a negotiable instrument releases any party to the instrument by any method other than cancellation, the party so released is discharged from liability. d) By allowing drawee more than forty- eight hours- If the holder of a bill of exchange allows the drawee more than forty-eight hours exclusive of public holidays, to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby discharged from liability to such holder. e) By non-presentment of cheque- where a cheque is not presented by the holder for payment within the reasonable time of its issue and the drawer suffers actual damage through the delay because of the failure of the bank, he is discharged from liability to the extent of such damage. In determining what reasonable time is, regard shall be had to the nature of the instrument, the usage of trade and of bankers. f) Cheque payable to order- Where a cheque payable to order purports to be indorsed by the payee, the banker is discharged by payments in due course. Where a cheque is originally expressed to be payable to bearer the drawer is discharged by payment in due course to the bearer thereof. It makes no difference even if any endorsement whether in full or in blank appears on the cheque and even if any such endorsement purports to restrict or exclude further negotiation. g) Draft drawn by one branch on another- Where any draft (that is an
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h)
i) 1. 2. 3. j) k)
order to pay money) drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand purports to be indorsed by or on behalf of the payee, the bank is discharged by payment in due course. Parties not consenting discharged by qualified acceptance- If the holder of a bill of exchange acquiesces (assents) in a qualified acceptance, all the previous parties whose consent is not obtained to such acceptance are discharged from liability, they will however, be liable if on a notice being given to them they give their assent to such acceptance. By operation of law- This includes dischargeBy an order of insolvency court, discharging the insolvent By merger- When a judgment is obtained against the acceptor, maker or indorser, the debt under the bill is merged into judgment debt. By lapse of time i.e., when the remedy becomes time barred. By material alteration- A material alteration of a negotiable instrument renders the same void against persons who were parties thereto before such alteration unless they have consented to the alteration. Discharge by payment of altered instrument- When a promissory note, bill of exchange or cheque had been materially altered but does not appear to have been so altered, or where a cheque is presented for payment which does not at the time of presentation appear to be crossed, payment on such an instrument discharges the party liable if he pays according to the apparent tenor of the instrument (as altered) at the time of payment and otherwise in due course. Such a payment cannot be questioned even if it is proved that the instrument has been altered or that the cheque was originally crossed.
Have you under stood ? Objective questions: 1. A bill is drawn, payable at door no.50, Lucknow road, Calcutta, but does not contain the name of the drawee. B who resides at door no.50, Lucknow road, Calcutta accepts the bill. Is it a valid bill? 2. A bill is drawn pay to A or order the sum of Rs.1000/. In the margin the amount stated is Rs.10, 000/ in figures. Is this a valid bill? 3. A, on attaining the age of majority, executes a fresh promissory note in consideration of a promissory note executed by him during his minority. Can a suit be maintained on the fresh promissory note? 4. A promissory note is executed by A in favor of B in consideration of C, a relation of B, forbearing to sue on a prior promissory note executed in favor of C. Is the note executed by A in favor of B any lawful consideration? 5. A accepts a bill payable at the syndicate bank, Chennai, and nowhereelse, is it a valid acceptance? Answers: 1. Yes 2.Yes 3, No 4.Yes 5.Yes
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Short questions: Q.1.5.a. What is negotiable instrument? Q.1.5.b. What are the types of negotiable instruments? Q.1.5.c. Distinguish a cheque with bill of exchange. Q.1.5.d. Define a holder in due course. Q.1.5.e. What is meant by acceptance of a bill of exchange? Q.1.5.f. When is a negotiable instrument said to be discharged? Extended Questions: Q.1.5.g. What are the provisions of the negotiable instruments Act? Q.1.5.h. Examine the liabilities of the drawer and the indorser in case of a bill of exchange. Q.1.5.i. Define acceptance for honor. Can the drawer of a bill of exchange accept it for honor? Q.1.5.j. Dishonor of a cheque for want of funds is an offence under the Negotiable instruments Act. Do you agree with the statement? Q.1.5.k. What is the difference between discharge of an instrument and discharge of a party to an instrument? 1.6 Agency Definition of an Agent: - Person employed to do any act for another or to represent another in dealings with third person. A approves B a broker to sell his car on his behalf then 1. A = Principal B = Agent 2. Relationship between A and B is Agency 3. Act of an agent is the act of the principal
1.6.1 Nature of agency Who can employ an Agent?

A major Partnership firms Any person of a sound mind Company, an Artificial person
Who may be an Agent? Person who is capable of contracting (If the agent happens to be a person incapable of contracting, then the principal cannot hold the agent liable, in case he misconducts or has been negligent in performance of his duties) Agent & Servant: - Agent is not a servant servant may be an agent Agent may work for several principals at the same time. Classification of Agent: I-Agents are classified as: 1. Commercial Agent (or) Mercantile Agent 2. Non-Commercial Agent (or) Non-Mercantile Agent
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Mercantile or Commercial Agent 1. Broker- Agent engaged to buy and / or to sell property or to make bargains and contracts between the engager and a third party for a commission called brokerage. 2. Factor Agent who is entrusted with possession of goods with an authority to sell them. He can sell the goods on credit in his own name. He is also authorized to raise money on their security. 3. Commission Agent- Agent who is employed to buy or sell goods or transact business. 3. Delcredere Agent -Agent whos consideration of an extra remuneration called a delcredere commission guarants the performance of the contract by the other parties. 5. Auctioneer - Agent appointed to sell goods by auction. 6. Banker - Buying & selling of securities, Collection of charges, bills, interests, etc. Non Commercial Agent:Wife-: If the wife and husband are living together and the wife is booking for necessaries she is an agent. When the wife lives apart from the husband, though no fault of hers, the husband is liable to provide her maintenance. If he does not provide for her maintenance, she has implied authority to bind the husband for redressal. II-Delegation of Agent Subagent and substituted Agent General rule is that an agent cannot appoint an agent. However an agent may appoint an agent in the following circumstances. (1) Where expressly permitted by the principal. (2) Where the ordinary custom of trade permits delegation. (3) The nature of agency is such that it cannot be accomplished without the appointment of sub agent. (4) Where the nature of the job assigned to the agent is purely clerical and does not involve the exercise of discretion. (5) In an unfrozen emergency. Sub Agent-: Person employed by and acting under the control of the original agent in the business of the agency. There is no priority of contact between the subagent and the principal. Substituted Agent: Where an agent appoints or names other person for being appointed as an agent in his person, such person is called a substituted agent. A directs B, his solicitor to sell his house by auction and to employ an auctioneer for the purpose. B names C an auctioneer to conduct the sale. C is not a sub agent but is As agent for the conduct of the sale.
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1.6.2 How the agency is created? Agency can be created in the following ways as mentioned below: Creation of an Agency 1) By an express agreement 2) By Implication 3) By ratification. Consideration is not essential to create an agency A-Express Agency The authority of an agent may be expressed by the following forms: Word of Mouth (Oral) By writing-usual form of written of agency Power of Attorney on stamped paper. B-Implied Agency Implied agency is possible by the below said method: From conduct, situation or relationship of parties. 1.6.3 Agents authority and liability of principal and third party The implied agency arises when the principal conducts himself towards the person alleged to be the agent or the third parties in such a manner, as if the principal had consented to the appointment of that person as agent. It includes: a) Agency by Estoppels- When a person has by his conduct or statements induced others to believe that a certain person is his agent; he is estopped from subsequently denying it. Estoppels arise when you are precluded from denying the truth of anything, which you have represented as a fact, although it is not a fact. b) Agency by holding out- P allows his servant A to buy goods for him on credit from C and pays for them regularly. On the occasion, P pays his servant cash to purchase the goods. The servant purchases the goods on credit, pocketing the money. C can recover the price from P since through previous dealings P has held out his servant A as his agent. c) Agency of Necessity- When somebody is forced to act on behalf of a particular person. e.g., The master of a ship which is in distress or requires heavy and urgent repairs can pledge the ship or cargo (without express or implied authority) and raise money in order to execute the voyage. He will be considered as the agent of the owner by necessity. d) Agency by ratification- When an agent does an act for his principal but without knowledge or authority or while he exceeds the given authority, the principal is not held bound by the transaction. The Principal if he so desires can ratify the act of the agent. Agency in such a case comes into existence from the moment the agent first acted.
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Requisites of valid ratification 1. Agent must contract as agent. 2. Principal must have been in existence at the time the agent originally acted. 3. Principal must also be competent of contracting at the time of contract as well as at the time of ratification. 4. Ratification must be done within a reasonable time. 5. The act to be ratified must be a lawful one. 6. Principal should have full knowledge of facts. 7. Ratification must be of a contract as a whole. 8. Principal must have authority to ratify. 9. Ratification cannot be made so as to subject a third party to damage or terminate any right or interest of a third person. 1.6.4 Rights and duties of the principal, agents and the third party A-Rights of an agent 1. Right to receive agreed or reasonable remuneration. 2. Right to retain money of the principal towards advances made or expenses properly included by him. 3. Right of lien to retain properties of the principal for the amount due to himself for commission, disbursements or services rendered. 4. Right of stoppage- in transit -in case. (i) where he purchases goods with his own funds or by incurring personal liability, (ii) where he holds himself liable for the price of the goods sold, for example delcredere agent. B-Principals duties to agent 1. To indemnify the agent against the consequences of all lawful acts done by such agent in exercise of authority conferred upon him. 2. Liable to indemnify an agent against the consequences of an act done in, good faith, though it causes an inquiry to the right of third persons. 3. The principal is not liable for acts which are criminal in nature though done by the agent at the instance of the principal. 4. The principal must make compensation to his agent in respect of injury caused to such agent by the principals neglect or want of skill. C-Duties of an agent 1. To conduct the business of agency to the principles directions and not to deviate even for the benefit of the principal, 2. To conduct the business with the diligence and skill generally possessed by persons engaged in similar business, 3. To render proper accounts, 4. In case of difficulty to communicate with the principal, 5. Not to make any secret profits, 6. Not to deal on his own account,
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7. Not entitled to remuneration for business misconduct, 8. An agent should not disclose confidential information, 9. When an agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to take on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him. 1.6.5 Liability of the principal for an agents torts A-Liability of the principal to third persons 1. Contracts entered into through an agent and obligations arising from acts done by an agent may be enforced in the same manner and will have the same legal consequence as contracts had been entered into and the acts done by the principal in person. 2. Liable for the acts of the agents falling within actual authority, afferent or ostensible authority. 3. Principal will be liable even for misrepresentatives made or frauds constituted, by an agent for his benefits. B-Personal liability of an agent 1. 2. 3. 4. 5. 6. 7. 8. Where acting for a foreign principal. Where acting for a principal whose name he does not disclose. Where the principal cannot be sued e.g. minor. Where he acts without authority or exceeds authority. Where be agrees to be personally bound. Where be signs a negotiable instrument in his own name. Where he is a factor or an auctioneer. Where he is guilty of fraud or misrepresentations in matters outside his authority. 9. Where trade or custom makes him personally liable. 10. Where agency is one coupled with interest. 1.6.6 Termination of agency The various modes of termination of agency are mentioned below: 1. by revocation by the principal. 2. on expiry of fixed period of time. 3. on the performance of the specific purpose. 4. In the event of insanity or death of the principal or agent. 5. on destination of the subject matter of agency. 6. In the event of insolvency of the principal. 7. by renunciation of agency by the agent. Have you understood ? Objective questions: 1. A police man, thinking that the driver of a bus was drunk, ordered him to leave the bus. The conductor asked the man in the street to drive the bus to its destination, a kilometer away. He drove the bus negligently and a passenger received injuries. Is the proprietor liable?
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2. A, professing to act for a joint stock company about to be incorporated, enters into a contract with B on its behalf as agent. After incorporation the company passes a resolution adopting As transaction. Is the company liable on the contract? 3. P instructed his agent A to sell a picture at a named price. P died. Afterwards, before the fact of his death became known to A, A sold and delivered the picture. Was the sale binding on Ps executors? 4. A not being authorized thereto by P, demands on behalf of P the delivery of a painting, the property of P, from T who is in possession of it. T refuses to deliver. Can P ratify the demand and render T liable for non-delivery? 5. M gave his wife authority to buy goods from D. M became insane, but the wife continued to buy from D, who did not know of Ms insanity. Is M liable to D? Answers: 1. No 2.No 3.Yes 4.No 5.Yes Short questions: Q.1.6.a. Define agent and principal. Q.1.6.b. What are the different kinds of agents? Q.1.6.c. Write short note on agency by holding out. Q.1.6.d. Define a sub-agent. Q.1.6.e. When is an agency irrevocable? Extended Questions: Q.1.6.f. Discuss the various ways in which the relation of agency arises. Q.1.6.g. Explain the nature of agency by ratification. Q.1.6.h. Discuss about the rights and liabilities of the principal and the agent. Q.1.6.i. Discuss the different modes in which the authority of an agent may terminate. Summary: A contract is an agreement made between two or more parties which the law will enforce. An agreement comes into existence by the process of offer by one party and its qualified acceptance by the other party and their must be consensus ad idem. There should be a consideration in a contract which means something in return. Every person is competent to contract who is of the age of majority, sound mind. A contract is said to be discharged when the obligations created by law comes to an end. In case of breach of a contract, the injured party is having the remedies according to the law of contract. In certain cases the law imposes an obligation and allows an action to be brought on it as if it arose out of an agreement, though none was present in fact called as quasi contracts. A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for the price. A stipulation in a contract of a sale with reference to goods which are the
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subject thereof may be a condition or a warranty. It is important to know that the property should be good passes of transfers from the seller to the buyer. It is the duty of the seller to deliver the goods and the buyer to accept and pay for them in accordance with the terms of the contract of sale. A Negotiable instrument is one, which is acquired by any one who takes it bonafide and for value, notwithstanding any defect of title in the person from whom he took it. This negotiable instruments act deals with promissory notes, bill of exchange and cheques with all the characteristics or essential elements. The capacity of a person is to incur liability as a party to negotiable instruments. When these instruments are transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated. 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. Any person who is of the age of majority, sound mind, according to the law may employ an agent.
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UNIT 2
COMPANY LAW
2.1
Introduction A company means a group of persons associated voluntarily together for the attainment of a common goal either, social or economic. Much the way people came together to buy and sell, lend and borrow, so did people come together and pooled their resources for common benefit. It represents different kinds of associations, both business and otherwise. Late 1800s early 1900 was the period of much industrial and commercial activity. The vigorous activity raised several disputes and the courts were called upon to adjudicate this. The courts had to apply the provisions in a new and emergent context. In this, the courts gave several landmark judgments in interpreting the provisions. The British Act, as well as the Indian Act, was amended, enlarged and consolidated several times. The law which governs companies in India at present is the Companies Act, 1956. As a result the companies act became voluminous. The Act, 1956 runs into 658 Sections and 15 Schedules. Companies incorporated under the Companies act, 1956 are mostly business companies but they may also be formed for promoting art, charity, research, religion, commerce, or other useful purpose.
2.2
Learning Objectives After studying this unit you should be able to:

Define a company Understand the principles of company Describe the scope and nature of the types of companies Know the formalities in forming a company Understand the Articles and Memorandum of Association Determine the powers, liability and duties of directors of the company Interpret the importance of Corporate Governance
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Definition Meaning of the company The company is one of the forms of organization. It has its distinctive characteristics and advantages which make it suitable for different purposes. Literary Meaning The term Company implies an association of a number of persons formed for some common object or objects. Legal Meaning According to section 3(1) (i) of The Companies Act, 1956, Company means a company formed and registered under this Act or an existing company. 2.3. COMPNAY LAW 2.3.1 Nature and Type of a Company On analyzing the aforesaid definitions the following characteristics of a company are revealed: 1. An artificial person created by law: A company is called an artificial person because it does not take birth like a natural person but comes into existence through law. Being the creation of law, the company possesses only those properties which are conferred upon it by its charter. 2. Separate Legal Entity: The case of Solomon v. Solomon and Company Ltd. Mr. Solomon was running a shoe business in England. He formed a company known as Solomon and Co. Ltd. It consisted of Solomon himself, his wife, his four sons and a daughter. The shoes business of Solomon was sold to the company for $ 30,000. Mr. Solomon received from the company purchase price in the form of $20,000 fully paid shares of $1 each and $ 10,000 in debentures which carried a floating charge over the assets of the company. One share of $1 each was subscribed for in cash by each member of course of business, the company became liable for some unsecured loan. The company ran into financial difficulties after some time and went into liquidation within a year. On winding up, the assets realized were $ 6,000. The company owed $10,000 to holder, (Mr. Solomon), nothing was left for unsecured creditors. Thus, after paying off the debenture priority over the debentures contending that Mr. Solomon and Solomon and Co. Ltd. were one and the same person, the Company was only a faade to defraud the innocent creditors. Mr. Solomon should not therefore, be treated as a secured creditor. Held: The Company had been validly constituted and it had an independent existence distinct from its members. Therefore, Mr. Solomons business belonged to the company and not to Mr. Solomon. The company and Mr. Solomon enjoyed separate legal entities. The fact that the members were from one single family had no bearing upon the validity of the company.
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3. Perpetual Existence: The term perpetual existence means the continued existence. The death, insolvency or unsoundness of mind of its members or transfer of shares by its members does not in any way affect the existence of the company. Members may come and members may go but the company goes on forever. The company can be compared with flowing river where water (members) keeps on changing continuously; still the identity of the river (company) remains the same. 4. Common Seal: The term Common Seal means the official signature of the company. Since the company being an artificial person cannot sign its name on a document, every company is required to have its common seal with its name engraved on the same. This seal acts as the official signature of the company. Any document bearing the common seal of the company and duly witnessed by at least two directors will be binding on the company. 5. Limited Liability: In case of a company limited by share, the liability of a member is limited up to the amount remaining unpaid on the shares held by a member. 6. Free Transferability of shares: The shares of a public company are freely transferable. A shareholder can transfer association, even a public limited company can put certain restrictions on the transfer of shares but it cannot altogether stop it. A shareholder of public company possessing fully paid up shares is at liberty to transfer his shares to anyone he likes in accordance with the manner provided for in the articles of association of the company. Types of Companies The companies can be classified under the three categories as follows: 1. 2. 3. 1. Basis of incorporation Basis of liability Basis of control Basis of incorporation: This is further divided into three categories. They are as follows: a) Charted company: A company incorporated under a special charter granted by the king or Queen of England is called Charted Company. The familiar examples of the charted company are the East India Company and the Bank of England. Now this type of company cannot be formed in India. b) Statutory Company: A statutory company is one which is created by a special Act of Parliament or a state legislature. Such companies are usually formed for achieving a purpose related with public utilities. The nature and powers of such companies are laid down in the special Act under which they are created. A statutory company has also a separate legal entity is conducted under the control and supervision of the Auditor General of India and the annual report of working is required to be placed before the Parliament or state legislature, a the case may be. Example, Reserve Bank of India.
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c) Registered or Incorporated Company: A registered company is one which is registered in accordance with the provisions of the Companies Act of 1956 and also includes the existing companies. Existing company means a company formed and registered under any of the previous laws. A registered company may either be a private company or a public company. It is explained as follows: I. Private Company- A private company means a company which has a minimum paid up capital of Rs.1,00,000 or such higher paid up capital as may be prescribed, and by its articlesa) Restricts the right to transfer its shares if any. b) Limits the number of its members to fifty. c) Prohibits any invitation to the public to shares in or debentures of the company. d) Prohibits any invitation or acceptance of deposits from persons other then its members, directors or their relatives. A- Restriction on Transfer of shares- The right of transfer is generally restricted in the following manner: i) Authorizing the directors to refuse shares to persons whom they do not approve or by compelling the shareholder to offer his shareholding to the existing shareholders first. ii) By inspecting the method for calculating the price at which the shares may be sold by one member to another iii) By providing that the shareholders who are employees of the company shall offer the shares to specified persons or class of persons when they leave the companys service. B - Limitation of Membership- The articles must contain a provision whereby the company limits the number of its members to 50. C - Prohibition on Making an Invitation to Public- The articles must prohibit any invitation to the public to subscribe for any of its shares or debentures. Such a prohibition is necessary for the substance of the private character of the company. D - Prohibition on Invitation/Acceptance of Deposit- The articles must prohibit any invitation to the public to Prohibit any Acceptance of Deposit. II- Public Company A Public company means a company which is either a) not a private company and has a minimum paid up capital of Rs 5,00,000 or such higher paid-up capital as may be prescribed: or b) is a private company which is subsidiary of public company. 2.Based on Liability On the basis of liability, an incorporated company may either be i) a company limited by shares ii) a company limited by guarantee iii) an unlimited company
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i)
Company Limited by Shares- A Company limited by shares is a company in which the liability of its members is limited by its memorandum to the amount unpaid on the share respectively held by them. The companies limited by shares may be either public companies or private companies. If a member has paid the full amount of shares, then his liability shall be nil. ii) Company Limited by Guarantee- A Company limited by guarantee is a company in which the liability of its members is limited by its memorandum to such an amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up. iii) Unlimited Company- An unlimited company is a company in which the liability of its members is not limited by its memorandum. In other words, the liability of members is unlimited. The members of such companies may be required to pay companys losses from their personnel property. 3. Based on Control On the basis of control, the companies may be grouped as follows: 1. Government Company- A government company means any company in which at least 51% of the paid up share capital is held by the central government or by any state government or partly by the central government and partly by one or more state governments and includes a company which is a subsidiary of a government company as thus defined. Example: Hindustan Aeronautics Ltd. 2. Non-Government Company- A company which may not be termed as a government company as defined in Section 617 is regarded as a nongovernment company 3. Foreign Company- A foreign company means a company, which is incorporated in a country outside India under the law of that country. After the establishment of business in India, the relevant documents must be filed with the registrar of companies within 30 days from the date of establishment. 4. Domestic Company-A company which cannot be termed as foreign company under the provisions of the companies act as a domestic company. 5. Holding and Subsidiary Company- If one company controls the other company, the controlling company may be termed as the Holding Company and company so controlled may be termed as a Subsidiary Company. 6. Multi National Company A multinational company is huge industrial organization whicha) operate in more than one country b) carries out production, marketing and research activities on international scale in those countries, and c) attempts to maximize profits world over.
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ILLEGAL ASSOCIATION [SECTION 11] Meaning of Illegal Association [Section 11 (1) and (2)] According to Section 11, No company, association or partnership consisting of more than 10 persons for the purpose of carrying on the business of banking and more than 20 persons for the purpose of carrying on another business shall be formed unless it is registered as a company under this Act, or is formed in pursuance of some other Indian law. Example: I Where an unregistered association is formed for carrying on the business of banking with 8 members. Subsequently 3 more persons join the association as members. The association would become an illegal association from the moment the number of its members exceed 10. Example II. Where an unregistered association is formed for carrying on the business of nonbanking with 18 members. Subsequently 3 more persons join the association as members. The association would become an illegal association from the moment the number of its members exceed 20. Example III Where an un-registered association is formed for noncommercial purposes such as promotion of religion, art, science, charity or any other useful object, with 18 members. Subsequently 3 more persons join the association as members. The association would not become an illegal association because the limit on maximum number of members is not applicable to such association. Example IV Where an association is formed between three partnerships firms X (having 8 persons), Y (having 7 persons), and Z (having 8 persons). Such association would be an illegal association because the limit on maximum numbers of members exceeds 20. Notes: (i) Every person (natural or otherwise) who holds an independent position in law and is capable of entering into contract shall be counted as one person. (ii) Two or more persons holding a share jointly are treated as a single member Non-Applicability of Section 11 Section 11 does not apply in the following cases: (a) Joint Hindu Family A Joint Hindu Family may carry on any business even for earning profits and with any number of members without being registered in pursuance of any Indian Law as required by Section 11 of the Companies Act 1956 and yet it will not be an illegal association. But, where two families join hands to carry on business, the provisions of Section 11 becomes applicable. However, for computing the number of members of such an association, the minor members of such families shall not be included. (b) Stock Exchange is not covered by Section 11 as it is not formed for the purpose of carrying on any business. (c) Non-Profit Earning Association- All religions, charitable, literary, social, sports and other association whose object is not to make profit are also not covered by Section 11.
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Consequences [Section 11 (4)] The consequences of an illegal association are as follows: 1. Personal Liability: Every member shall personally liable for all the liabilities incurred in carrying on the business. 2. Punishable with Fine: Every member shall be punishable with fine not exceeding Rs, 10,000. 3. Neither such an association nor its members in their individual capacity can sue any outsider who has dealt with it. 4. Neither members Nor outsiders can sue such association. 5. No member can sue another member in respect of any matter connected with such association. 6. Outsider can sue the members but not such association. 7. Such an association can not enter into any contracts since it has no legal existence. 8. Such an association can not be wound up under the provisions of Companies Act relating to winding up of unregulated companies as well as through court because there is nothing to dissolve at all. [Mewa Ram v. Ram Gopal] 9. Once the association contravened the provision of Section 11, it remains illegal even if there is subsequent reduction in the number of its members. In other words, the illegality of an illegal association cannot be cured by subsequent reduction in the number of its members. (Madanlal v. Jankli Parshad] 10. Contracts made before the registration cannot be validated and issued upon by subsequent registration. [Gujarat Trading Co. v. Tricumji] 11. Illegality or invalidity in the constitution of an association does not affect its liability to tax or its chargeability as a unit of assessment. (Kumaraswamy Chettiar v. ITO 1957] 12. No suit either for administration or partition of assets of an illegal association can be filed by any member of such an association. In Mewa Ram v. Ra, Gopal High Court of Allahabad held that such partition of assets of an illegal association is not possible at all because a decree for partition would amount to be in substance a direction for winding up or a decree for dissolution and accounts. 13. A member of an illegal association who has paid any money to such association would be able to recover it form the director or agents or association before the money so paid has been applied to an illegal purpose. [Greenpur v. Co-operatives (1926)] 14. Members of an illegal association have a beneficial interest in the property belonging to such association [Queen v. Tankard, (1894)].
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2.3.2. Formation of company 2.3.2.1 How to form a company? The various steps involved in the formation of a company are given below: I. Approval at name Step No.1 consult a. the latest edition of Directory of Companies together supplements updating it, b. the Guidelines issued by the Department of Company affairs, and c. the Emblems and Names (Prevention of Improper Uses) Act, 1950 Step No. 2 Select in order of preference at least three names which a. are not identical with or too similar to the name of another registered company, b. are not prohibited under the Emblem and Names (Prevention of Improper Uses) Act, 1950 and c. are not in contravention of the Guidelines issued by the Department of Company affairs. Step No. 3 Apply to the Registrar of Companies of the state in which registered office is to be situate to ascertain the availability of names in the prescribed Form No. 1A long with a fee of Rs,. 500 Step No.4 Get ensured about the availability of names within 14 days from date of submission of application since the Registrar is required to inform the status of the application within 14 days. (a) If available Complete all the formalities within a period of 3 months. (b) If not available Apply again (if satisfied with the reason for refusal given), or Make an appeal against refusal. II. Memorandum and Articles of Association Step No.5 Get the Drafts of Memorandum of Association and Articles of Association Prepared. However a public company limited by shares need not prepared its own articles. It may adopt Table A as given in Schedule I of the Act. Step No. 6 Get the Draft of Memorandum of Association and the Articles of Association vetted by the Registrar. Step No. 7 Get the Memorandum Association and Articles of Association printed. Step No. 8 Get the Memorandum of Association and Articles of Association stamped. Step No. 9 Get the Memorandum of Association and Articles of Association signed by atleast 2 subscribers in case of a private company and 7 subscribers in case of a public company. Each subscriber shall also write in his own hand his address, description, occupation and number of shares subscribed for in presence of at least one witness who shall attest the signature and shall write his own hand his address, description and occupation (if any). These documents may be signed by an outsider against if he is authorized to do so by a power of attorney.
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Step No. 10 Ensure that Memorandum and Articles of Association are dated on a date after the date of stamping. III. Consent to Act as Direction in Form No. 29 Step No. 11 Get Form No. 29 (in duplicate) duly filled up and signed to accord to consent of a person willing to act as director if he is so appointed by the Articles of Association of a public company having share capital [Section 266]. IV. Notice of Situation in Form No. 18 (May be given within 30 days of Incorporation) Step No. 12 Get Form No. 18 (in duplicate) fully filled up and signed to give the notice of the situation of the registered office of the company if the subscribers have already chosen a registered office and they wish to give notice to the Registrar at the time of registration. Alternatively such notice may be given within 30 days of the incorporation of the company. [Section 146] V. Particulars of Directors, Manager or Secretary in Form No. 32 May be given within 30 days of Incorporation. Step No. 13 Get Form No. 32 (in duplicate) duly filled up and signed to provide particulars of directors, manager or secretary if they are appointed by Articles of Association and the subscribers wish to give notice to the Registrar at the time of registration. Alternatively, such form may be sent within 30 days of appointment of first directors. VI. Statutory Declaration in Form No.1 Step No. 14 Get the statutory declaration prepared in Form No.1 statutory declaration is a declaration to the effect that all the requirements of the act and rules there under relating to the registration of the company have been complied with. Such declaration can be signed by any one of the following persons: a. an advocate of the Supreme Court or of a High Court; or b. an attorney or a pleader entitled to appear before a High court; or c. a secretary, or a chartered accountant practicing in India and who has been engaged in the formation of the company; or d. by a person named in the articles as a director, manager of secretary of the company. VII. Filing of Documents with Fees Step No. 15 File the following document with the Registrar of companies along with the forwarding application with necessary registration and filing fees: a. The Memorandum of Association, duly signed by the prescribed minimum number of subscribers, and duly stamped and signed by witness. [Section 33(1) (a)] b. The Articles of Association similarly signed, stamped and witnessed. [Section 33 (1) (b)]
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c. A copy of agreement, if any, which the company purposes to enter into with any individual for appointment as its managing director or whole-time director of manger [section 33 (1) (c)] d. A copy of any other agreement, if referred to in the Memorandum and Articles of Association in that case, it will form a part of the Memorandum and Articles of Association. e. Power of Attorney duly stamped and signed by the subscribers authorizing a representative to make amendments and/or alterations in the Memorandum and Articles of Association f. A Certified copy of letter of the Registrar of Companies, intimating the availability of the proposed name. g. Consent of director or act in Form No. 29 (in duplicate) wherever necessary. h. Notice of the situation of the registered office in Form No. 18(in duplicate) wherever necessary. i. Particulars of directors, managing director, manger and secretary in Form No. 32 (in duplicate) wherever necessary j. Statutory declaration in Form No. 1 VIII. Certificate of in-corporation When the necessary documents have been filed with the Registrar along with the payment of requisite fee, the Registrar shall scrutinize these documents and if he is satisfied that (a) all the documents are in order and (b) the requirement of the Act in respect of registration have been duly complied, with he shall enter the name of the company in the Register of Companies and shall issue a certificate which is termed as Certificate of Incorporation. Note: If the Registrar is of the view that there are some minor defects in any document, he may require that the defects be rectified. But, if there are some material and substantial defects, the Registrar may refuse to register the company. Contents of Certificate of Incorporation The certificate of incorporation contains: (a) the name of the company, (b) the date of its issue and (c) the signature of the Registrar with his seal. This certificate is literally the birth certificate of the company evidencing that the company is born with its name on the date mentioned in the certificate. Note: A print of this certificate is to be a part of all copies of Memorandum and Articles of association. 2.3.2.2 Conclusiveness of Certificate of Incorporation 1. According to Section 35 of the Companies Act. Certificate of incorporation given by the Registrar of Companies in respect of any association shall be conclusive evidence that all the requirements of Companies Act have been complied with in respect of its registration as well as matters precedent and incidental thereto,
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2. 3.
4.
5.
6.
and the association is a company authorized to be registered and duly registered under the Act. Certificate cannot be disputed on any ground whatsoever and nothing is required to be inquired into as to the regularity of the prior proceedings. In view of the exclusiveness of its certificate of Incorporation, irregularities relating to procedural matters pertaining to registration such as defects in the signatures of the subscribers, or other prescribed particulars will not affect the legal status or personality of the company though it does not prevent an aggrieved person presenting a claim against persons responsible for getting the company incorporated. In Peers case, the memorandum was found materially altered after the signatories had signed but before registration. It was held that the corporate status remained unaffected and the certificate of incorporation was valid. In Moosa Goolam Arif v. Ebrahim Goolam Arif, the memorandum of association of a public limited company was signed by two adult persons. Other five members of the company were minor. Their guardian made separate signatures for each of the minors. The Registrar registered the company and issued the certificate of incorporation. The incorporation of the company was challenged and the plaintiff prayed that the certificate of incorporation should be declared void. The Privy Council rejected the plea of the plaintiff and held that the certificate of incorporation was valid. The certificate of incorporation is also a conclusive proof of the fact that the company came into existence on the date mentioned in the certificate. In the case of Jubilee Cotton Mills Ltd., v. Lewis, the company delivered to the Registrar of Companies documents required for the registration of the company on 6th January. On 8th January, the Registrar registered the company and issued the certificate of incorporation but dated it January 6th. The company allotted few shares to Mr. Lewis of 6th January. The allotment was challenged and the court was requested to declare the allotment as void. The court held that the certificate of incorporation is conclusive evidence of all that it contains. Hence, the company shall be deemed to have been formed on 6th January and allotment of shares was valid. Certificate of incorporation is not the conclusive proof with respect to the legality of the objective of the company, mentioned in the objects clause of the Memorandum of Association. As such, if a company has been registered whose objects are illegal, the incorporation does not validate the illegal object. In such a case the only remedy available is to wind up the company.
2.3.2.3 Effects of registration 1. From the date of incorporation, the original subscribers to the memorandum as well as the other persons who may, from time to time, become members of the company, shall constitute a body corporate by the name contained in the Memorandum of Association. [Section 34 (2)]
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2. The body corporate shall be capable of exercising all the functions of an incorporated company. [Section 34(2)] 3. The company shall have perpetual succession. [Section 34(2)] Perpetual existence shows the properties of immortality. In other words, it means that a companys existence shows the properties of immortality. In other words, it means that a companys existence persists irrespective of the change in the composition of its membership. It continues to exist even if all its human members are dead. The company may be compared with a flowing river where water (members) keeps as changing continuously still the identity of the river (company) remain the same. Since it is created by law, it can be put to an end only by the process of law. Thus, a company shall continue by law, it can be put to an end only by the process of law. Thus, a company shall continue to exist indefinitely till it is wound up in accordance with the provision of the Companies Act. 4. The company shall have Common Seal. [Section 34 (2)] Common Seal means the official signatures of the company. Any document bearing the common seal of the company and duly witnessed by at least two directors will be legally binding on the company. 5. Members are liable to contribute to the assets of the company in the events of its being wound up to the extent of their contract or guarantee as the case may be. [Section 34 (2)] 6. The memorandum and articles when registered shall bind the company and members. [Sec. 36 (1)] 7. All money payable by any member to the company under Memorandum or Articles shall be a debt due from him to the company. [Section 36 (2)] 8. The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company and on its registration, shall be entered as members in its Register of Members. [Section 41 (1)] 9. A private company can commence its business immediately after obtaining the certificate of incorporation. Judicial Rulings 1 . A company on registration acquires a separate existence and the law recognizes it as a legal person separate and distinct from its members [State Trading Corporation of India. v. Commercial Tax Officer, AIR 1963 SC 1811]. 2. Merely because a company purchased all shares of another company it will not serve as a means of putting an end to the corporate character of another company because each company is a separate entity [Spencer & Co., Ltd., Madras v. CWT Madras, (1969) 39 Comp. Case 212]. 3. Even if the entire share capital is held by the President of India it does not make a company an agent either of the President [Heavy Electrical Union v. State of Bihar, AIR 1970 SC 82].
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2.3.2.4. Promotion Meaning of Promotion Promotion is the first stage in the formation of a company. Promotion involves identification of a business opportunity or idea, analysis of its prospects and taking steps in implement it through the formation of a Company. C.W. Gerstenberg has defined promotion as the discovery of business opportunities and the subsequent organization of funds, property and managerial ability into a business concern for the purpose of making profit there from. Promotion stage comprises the following activities to be undertaken: a) b) c) d) Discovery of business idea or identification of business opportunity. Detailed investigation to find out the strong and weak points of the idea. Organization of resources. Securing the co-operation of the required number of persons willing to associate themselves with the project. e) Obtaining the consent of persons willing to act as first directs. f) Appointing Legal Advisors. g) Application for proposed name of the company. h) Preparation of necessary documents like memorandum of association, articles of association. i) Entering into preliminary contracts. j) Filing of the necessary documents with the Registrars. Meaning of Promoters The Companies Act does not define the term promoters any where; it only refers to the liabilities of the promoters. A number of judicial decisions have defined the term promoter. 1. According to L.J. Bowen, the term promoter is a term not of law but of business, usefully summing up in a single word, a number of business operations familiar to the commercial word y when a company is generally brought into existence. 2. Lord Blackburn states that the term promoter is a short and convenient way of designing those who set in motion the machinery by which the Act enables them to create an incorporated company. 3. Justice C. Cockburn described a promoter as one who undertake to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose. Thus, a promoter is one who identifies a business opportunity, idea, analysis its prospects and takes steps to implements it through the formation of a company. A company may have more than one promoter. The promoter may be an individual, firm, an association of persons or a body corporate. The promoter may be an individual, firm, an association or persons or a body corporate. For example, J.R.D. Tata was promoter of Tata Group, G.D. Birla was promoter of Birla Group, Dhirubhai Ambani was the promoter of Reliance Group.
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Who are not Promoters? Everyone who is associated with the process of the formation of a company cannot be called a promoter. The following persons cannot be called as promoters: a) Persons acting only in a professional capacity.[Section 62(6)] Example; A solicitor who draws up the documents of the proposed company in his professional capacity is not a promoter in the eyes of the law. Similarly, an engineer who advises on the selection of site or a valuer who helps with drawing the estimates would not be regarded as a promoter. (b) A persons cannot be held as promoter merely because he has signed at the foot of the memorandum or that he has provided money for the payment of formation expense. [G. Tiruvengadacharir v. Value musaliar, (1838) I.L.R. Mad. 192] (c) Individuals do not become promoters because they buy property, subsequently sold by them to a company at a profit even though the consideration consists of shares in the same company. But where certain persons buy property with a view to selling it later to a company to be formed by them, such persons will be regarded as promoters from the moment they took first step to carry out that object [Gluckstein v. Barnes, (1900 A.C. 240] From the above statements it should be clear to you that a promoter is one who performs the preliminary duties necessary to bring a company into existence. Thus, the true test to describe a person as a promoter lies in finding out whether he is keen to form a company and take steps to give it a concrete shape. Thus, whether a person is a promoter, in any particular case depends on the facts having regard to the nature of persons role and his relationship to the company that is formed. Functions of a Promoter The various functions performed by the promoters include the following: (a) To Conceive Business Idea: First of all the promoters conceives the idea of business. (b) To make Detailed Investigation: After conceiving the idea of business, they make detailed investigations to find out the weakness and strong points of the idea. (c) To Organize the Resources: After satisfaction about the profitability and feasibility of the idea, they organize the resources to convert the idea into a reality by forming a company. The steps to be taken in this regard include the following: (i) Securing the co-operation of a the required number of persons willing to associate themselves with the project (Note: 7 persons are
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(ii) (iii) (iv) (d)
(e)
(f) (g)
required to form public company and 2 persons are required to form a private company). Appointing Legal Advisors and other experts. Entering into preliminary contracts. Preparing a detailed financial plan. To Obtain the Consent of Persons Willing to Act as First Directors : The first directors are generally appointed by the promoters. The promoters seek the consent of some individuals whom they deem appropriate so that they agree to be the first directors. To Decide about the Name of the Company : The promoters have to seek the permission of the Registrar of companies for selecting the name of the company. The promoter usually gives three names in order of preference. The promoters should ensure that the name of the company should not be identical without should not too closely resemble the name of another existing company. To Get the Necessary Documents Prepared: The promoters on the advice of legal experts get the memorandum of association and articles of association prepared and printed. To Arrange for Filling of the Necessary Documents with the Registrar: The promoters are required to pay the stamp duty, filing fee and other charges for registration of the company. The promoters are to see that the various legal formalities for incorporating the company are complied with.
Legal Position of Promoters The legal position of a promoter is somewhat peculiar. The promoters legal position is that he is neither an agent nor a trustee of the company he promotes. He is not an agent because there is no-principal in existence. You will recall from your exposure to the Contract of Agency that in order to be a valid contract of agency both the principal and the agent must be in existence. For the same reason, he also cannot be called the trustee of the company.. However, it does not mean that the promoters do not have any legal relationship with the proposed company. The legal position of a promoter can be correctly described by saying that he stands in fiduciary position (relationship of trust and confidence) in relation to the company he promotes. The fiduciary relation of a promoter really begins when the company is formed. Lord Cairns has rightly stated the position of promoter in Erlanger v. New Sambrero Phosphate Co., The promoters of company stand undoubtedly in a fiduciary position. They have in their hands the creation and moulding of the company. They have the power of defining how and when and in what shape, and under whose supervision, it shall come into existence and begin to act as a trading corporation. In fact, the promoters occupy a fiduciary position in regard to the company they promote and also the original allottees that they induce to buy shares of the company.
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Duties of Promoters The fiduciary obligation of a promoter begins as soon as he sets out to act for or promote the company. The fiduciary obligation of promoters means an obligations of promoters to disclose fully all material facts relating to the nature and extent of contract and profit made by them either directly or indirectly. Such disclosure must be express and actual and not merely constructive. The promoters in their fiduciary capacity have the following important duties: (a) Not to make Secret Profit: A promoter cannot make any direct or indirect profits out of the promotion of the company. Since he occupies a position of a trust, it is his duty to be honest and uphold the trust of his position. The law prohibits only the making of secret profit i.e. the profits which the promoter has not disclosed to the company. The promoters of a company are perfectly free to make a profit provided they disclose this fact to an independent Board of Directors. If there is no independent Board of Directors, then he must disclose the profits to the intended shareholders. When a promoter makes a secret profit, the company has the following remedies against him: (i) Recession of the Contract: The company may on learning of the secret profit, rescind the contract entered into by the promoter to make the said profit. (ii) Order for Refund: The Company may require the promoter to refund the amount of secret profit. (iii) Suit for Breach of Duty: The Company may sue the promoter for misfeasance, a promoter, by making the secret profit, has defaulted in his duty towards the company. (b) To make full Disclosure to the Company of all Relevant Facts: In keeping with his fiduciary capacity, a promoter is bound to disclose to the company all relevant facts including any profit made from the sale of his own property to the company and his personal interest in a transaction with company. While making a disclosure the promoter must make the full and complete disclosure. If the contracts to sell his own property to the company without making a full disclosure, the company may either repudiate the contract or affirm the contract and recover the profits made by the promoter. Such disclosure is ineffective if made merely to directors who are nominees of the promoters. Disclosure may be made either to an independent border by means of prospectus to the prospective shareholders. If the promoter makes a secret profit the company can rescind the contract of compel him to account for it. Where all the members of a private company are cognizant of the facts, the rule would not apply. Let us explain these fiduciary duties of the promoter with the help of case of Erdanger v. New Sombrero Phosphare Co., (1878) 3 A.C. 1218. A was the owner of some land. He and some of his friends, decided to form a company to manufacture microchips. They appointed the first directors of the company and A sold his own land to the company at a price higher than the actual valuation of the land. When the company was
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formed, the purchase agreement of land was approved at the meeting of the shareholders but the fact of As ownership and the profit made by him were not disclosed at the meeting. Subsequently when the company went into liquidation, the liquidator filed a suit against A to recover the profits made by him in the sale of land. You would observe that in this case A had defaulted in his duty to make full disclosure of all material facts and had made a secret profit out of promotion. As there was no disclosure by the promoters of the profits they were making, the company is entitled to rescind the contract. A could have retained the profit made by him if he had made a full disclosure to the directors of the company or to the shareholders of the company, all the relevant facts of the transaction including his personal interest and the profits made. (c) To give the Benefit of Negotiation to the Company: The promoter must pass on to the company, the benefit of any negotiation or agreement that he has carried on in his capacity of a promoter. For example, when he has negotiated a certain price for some land for the company, he must sell the property to the company at the negotiated price. If he charges a price higher than the negotiated price, the company may rescind the contract on discovering the truth of the matter. If, due to some reason, the contract could not be rescinded, the company is entitled to claim damages from the promoters and the amount of damages shall be equal to the amount of profits made by promoters. However, it should be remembered that secret profits on the sale of property can be recovered from the promoter only when the property was bought and sold to the company while he was acting as a promoter. The promoter must act honestly and diligently to escape liability with respect to dealing with the future company and the outsiders. (d) Duty of Promoters towards Future Allottees: The promoters stand in a fiduciary position towards the company. It does not mean that they stand in such relation only to the company but they also stand in this position to the future allottees of shares. The promoters must ensure that the prospectus issued at their instance contains all materials facts and particulars and does not contain any misstatements. Liabilities or promoters The liabilities of the promoters under the various provisions of The Companies Act are discussed below: (i) Liability for not complying with the provisions of section 56: Explains the matters that should be stated and the report that should be stated and the reports that should be set out in the prospectus. If this provision is not complied with, the promoter may be held liable by the shareholders. (ii) Civil Liabilities for any untrue statements made in the prospectus [Section 62]: The promoter may be held liable to pay compensation to every person who subscribes for shares or debentures for any loss or damage sustained by him on account of the untrue statement
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made in the prospectus. Under Section 62 specific provisions have also been made of the grounds on which the promoter can avoid his liability. (iii) Criminal Liabilities for Issuing a Prospectus which Contains Untrue Statements [Section 63]: The promoter can be held criminally liable if the prospectus issued by them contained mis-statements. The punishments prescribed are imprisonment extending up to two years or a fine up to Rs. 50,000 or both. The promoters may have to bear this criminal liability for misstatements unless he can prove that the untrue statement was immaterial or that he was justified in believing, because of reasonable grounds, that the statement was true at the time of issue of prospectus. (iv) Liabilities for Public Examination [Section 478]: If in the event of winding up of the company the liquidators report alleges a fraud in the promotion or formation of the company, the promoter can also be held liable for public examination by the Court like any other director or officer of the company. (v) Liability for Misfeasance or Breach of Trust by Misapplication of Funds [Section 543]: Like any other director or officer of the company, a promoter can also be held liable if he had misapplied or retained nay of the property of the company or is found guilty of breach of trust or misfeasance in relation to the company. (vi) Liable to the Suspended from Taking Part in the Management of the Company [Section 203]: The court may suspend a promoter from taking part in the management of the company for a period of five years if he is convicted of any offence in connection with the promotion, formation or management of a company. (vii) Personality Liability for Pre-incorporation Contracts: Even the death of the promoter does not relieve him from this liability Remuneration of promoters A promoter has no right to demand any remuneration from the company, for his promotional services in the absence of an express contract with the company. In the absence of a contract, he cannot even recover from the company payments he has made towards legal fees, stamp duties, registration fees, or other expenses in connection with the formation of the company. He, therefore, is not entitled to recover any remuneration for his service unless the company after getting formed enters into a specific contract with the promoter for this purpose. Even if the promoter has entered into a contract with the prospective directors before the incorporation, he has no valid claim against the company for remuneration. This is so because the directors cannot enter into any contract on behalf of a company that is not yet in existence. There are also cases where the articles of a company may specifically provide that a specified sum may be paid to the promoters as remuneration for their services. While this provision gives the director an authority to make such payment, it does not give the promoters a right to claim remuneration or to sue the company, for the same.
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Modes of Giving Remuneration The remuneration may be paid to the promoters in any of the following ways: (i) He may be allowed to sell his own property to the company for cash at a price higher than the valuation, after he has made a full disclosure about the valuation and the profit earned by an independent Board of Directors. (ii) If the promoter has purchased some business or some other property to be sold to the company, he may sell the same to the company at a higher price after making a full disclosure of the price paid and the profit earned. (iii) The company may allot to the promoters fully paid up shares of the company. (iv) He may be paid a certain lump-sum by the company as a remuneration of services rendered. (v) He may be given a commission at fixed rate on the shares sold. (vi) The company may give him an option to subscribe for a certain number of the companys un-issued shares at par. This option is generally limited to a certain period which means that the promoter must subscribe to the shares within a certain time. Disclosure in Prospectus Whatever is the manner in which the company chooses to compensate for the services of the promoter, the amount of remuneration and the manner of payment must be disclosed in the prospectus, if the remuneration is paid within two years preceding the date of the prospectus. Preliminary contracts or pre-incorporation contracts Meaning of Preliminary Contracts Preliminary contracts are those contracts which are entered into by the promoters for an on behalf of the proposed company before its incorporation. These contracts are generally entered into by the promoters to acquire some property or some rights for the proposed company. For example, contract with the vendor to sell his running business to the proposed company, contract for the purchase of property for the proposed company, contract for the grant of a lease for the proposed company. Legal Position of Preliminary Contracts The legal position of preliminary contracts can be explained as follows: 1. The Company is not bound by the Preliminary Contracts: The Company cannot be held liable for the preliminary contracts. A company is not bound by the preliminary contracts even if the company has taken the benefit of the work on its behalf under the contract. In case of Re English and Colonial produce Ltd., (1906) 2
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2.
(a)
(b) (c) (d) (a) (b) 3.
Ch. 435. a solicitor was appointed by the promoters of the company and was instructed by them to prepare the articles and the memorandum of the company. The solicitor also paid the necessary registration fee of the company. These promoters later became the directors of the company. The solicitor sued for his expenses and the fees paid by him. It was held that since the company was not in existence when these expenses were incurred, the company is not bound to pay. The Company cannot Enforce Preliminary Contracts: The company cannot enforce such contracts made before incorporation, by the promoters. This means that on account of a preliminary contract the company does not get a right to sue the third party for fulfillment of the contract. In case of Natal Land Co. V Pauline Colliery Syndicate (1904) A.S. 120, the owner of a piece of land agreed to lease it to a company to be formed by promoters. The promoters later on formed a company. On some prospecting of the land, it was discovered that there was a definite possibility of striking of the land, it was discovered that there was a grant of lease to the company. It was held that the company cannot sue owner and cannot claim specific performance as it was not even in existence when the lease was signed. Thus preliminary contracts cannot be enforced by or against the company, Exception to above principles The provisions of Sections 15(h) and 19(e) of The Specific Relief Act, 1963 provide an important exception to the general principle preliminary contracts can not be enforced by or against the company. According to Sections 15(h) and 19(e) of the Specific Relief Act, 1963, where the promoters of the company have entered into contracts before its incorporation, specific performance may be obtained by or against the company if Such contracts are for the purposes of the company. The term contracts for the purposes of the company means contracts which are necessary for the incorporation and working of the company. For example, contracts for the preparation and printing of the memorandum and articles or contracts for the supply of necessary raw material for the production work in the company are contracts for the purposes of the company. Such contracts are warranted by terms of incorporation. Such contracts are accepted by the company after its incorporation The acceptance of such contracts is communicated by the company to the other party to the contract. However the above provisions are not applicable for: Contract to take shares, Contract to render personal services. The Company cannot Ratify the Preliminary Contracts: The Company cannot ratify the preliminary contracts after incorporation because for valid ratification of a contract, the principal must have been in existence on the date when the contract is originally entered into. In case of Kelner v. Baxter, It was held as the company was not in existence when the preliminary contracts were made; it could not be
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bound by a purported ratification. What the company can do is to enter into a new contract with the vendors after incorporation to give effect to the terms of the contract made before incorporation. 4. The company cannot Adopt Preliminary Contracts: The company cannot adopt preliminary contracts after its incorporation either by passing a special resolution or by making adoption of such contract as one of the objects of company in its memorandum of association [North Sydney Investment Company v. Higgins (1999) A.C. 263] 5. Personal Liability of the Promoter for Preliminary Contracts: The promoters are personally liable for the preliminary contracts. The reason for this is that the preliminary contract is made for a company which, as known to both the contracting parties, is as yet non-existent. The contract, therefore, is deemed to be personally entered into by the promoters and they will be held personally liable for the performance of these contracts. The promoters will continue to be personally liable until the company after its incorporation adopt preliminary contracts by entering into new contracts with the third parties on the same terms as were embodied in the original contracts. The preliminary contracts made by the promoters generally contain a provision that if the company adopts the agreements on incorporation, the liability of the promoters shall come to an end and if the company does not adopt the preliminary contract within a specified period either party may rescind the contract. In such a case, liability of the promoter will cease on the expiry of the specified period. 2.3.2.5. Certificate of commencement of business Meaning of certificate of commencement of business The certificate of commencement of business is a certificate which entitles a company to commence business or to exercise borrowing powers. Companies not required to obtain certificate of commencement of business Since a private company (whether or not having share capital) and a public company having no share capital can commence business immediately after its incorporation, such companies are not required to obtain certificate of commencement of business. Company which is required to obtain certificate of commencement of business A public company having share capital is required to obtain certificate of commencement of business from the Registrar before it can commence its business or exercise borrowing powers. Procedure for obtaining the certificate of commencement of business I. If a public company, having share capital, has issued a prospectus, inviting the public to subscribe for its shares or debenture, it cannot commence any business or exercise borrowing power unless 69
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a. The company has allotted the shares up to the amount of minimum subscription Every director has paid to the company, in cash, the application and allotment money on the shares taken or contracted to be taken by him in the same proportion as public. b. No money is liable to be repaid to the applicants for failure to apply for or to obtain permission for the shares or debentures to be listed on any recognized stock exchange. c. Duly verified declaration in the prescribed Form No. 19 has been filed with the Registrar. The declaration must specify that Clauses (a), (b) and (c), as above have been complied with. The declaration must be verified by one of the directors or the Secretary of the Company. Where the Company has not appointed a Secretary, the declaration may be verified by a Secretary in whole-time practice. II. If the company has a share capital but does not issue a prospectus inviting the public to subscribe for its shares, the company cannot commence any business unless a. The company files with the Registrar, a statement in lieu of prospectus, along with the report specified in Part II of Schedule III. The statement should be filed with the Registrar at least three days before the first allotment. b. Every director of the company has paid to the company, in cash, the application and allotment money on the shares taken or contracted to be taken by him. c. A duly verified declaration in the prescribed form has been filed with the Registrar at least three days before the first allotment is made. The declaration must specify that the above conditions have been complied with and must be verified by one of the directors or the Secretary of the Company. In case the company has not appointed a Secretary, the declaration may be verified by a Secretary in whole time practice. [Section 149 (2)] When the above requirements are duly fulfilled, the Registrar shall issue a certificate known as certificate of commencement of businesses. This document certifies that the company is entitled to commence business and is also a conclusive evidence of the fact that the company is so entitled. Any contract entered into will be binding on the company. 2.3.2.6. Consequences of Default [Section 149(6)] If any company commences business in contravention of these provisions, every person who is responsible for the default shall be punishable with fine which may extend to Rs. 50,000 for every day during which the default continues. Consequences of not Commencing Business [Section 433 (c)] If any company does not commence its business within one year of its incorporation, it is liable to be wound up by the court under Section 433.
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2.3.2.7. Provisional contracts Meaning of Provisional Contracts Provisional Contracts are those contracts which are entered into by the company after obtaining the certificate of incorporation but before obtaining the certificate of commencement of business. Legal Position of Provisional Contracts According to Section 149(4) such contracts are purely provisional in nature and shall not be binding on the company until the date on which it becomes entitled to commence business. Therefore, if a company enters into contract after its incorporation but never gets the certificate to commence business, contracts so entered shall not be binding upon the company. However, on the issue of the commencement certificate, such contracts become automatically binding on the company and need no ratification. For example, Mr. X will not succeed in recovering the amount from the company because the company never became entitled to commence business. [Re Otto Electrical Co., (1906)] 2.3.3. Memorandum and Articles of Association 2.3.3.1. Meaning of memorandum of association According to Section 2(28) of The Companies Act, Memorandum mean the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company laws or of this Act. But this definition is not an exhaustive one. The status and importance of Memorandum of Association has been clearly brought out in many decided cases as follows: 1. Memorandum of Association of a company contains the fundamental conditions upon which alone the company is allowed to be incorporated. They are conditions introduced for the benefit of the creditors and the outside public as well of the shareholders. [Guinness v. Land Corporation of Ireland, (1882) 22 Ch.D. 359] 2. In cases of Ashbury Rly. Carriage and Iron Co. V. Riche, (1875) LR 7HL 653, Lord Cairns observed Memorandum of association of a company is it charter and defines the limitations on the powers of the company established under the Act, that it contains in it, both that which is affirmative and that which is negative and that it states affirmatively, the ambit and extent of vitality and power which by law are given to the corporation and it states negatively that nothing shall be done beyond that ambit. 3. Memorandum of Association defines its relations with the outside world and the scope who deals with the company to know that is its permitted range of activities [Egyptian Sal and Soda Cpo. Ltd., v. Portsaid Salt Association, 1931 A.C. 677]. To sum up, Memorandum of Association is the constitution of the company which lays down the fundamental conditions upon which along the
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company is allowed to be formed. It defines as well as confines the powers of the company. It not only shows the objects of formation but also determines the utmost possible scope of its operations beyond which its action cannot go. If it enters into a contract which is beyond the powers conferred on it by the memorandum, such contract will be ultra vires the company and hence void. Even the unanimous consent of the entire of is members cannot ratify such contract. Thus, in this respect it is the companys charter defining its constitution and scope of the powers with which it has been established under the Act. 2.3.3.2. Purpose of memorandum of association The Memorandum of Association is a public document which is open for inspection by any member of the public on payment of prescribed fees [Section 610]. Therefore, every person who deals with the company is presumed to have the knowledge of its contents. The purpose of Memorandum is two-fold a) First, to enable the intending shareholders to know the purpose for which their money is going to be used and within what field they are taking risk in making the investment. b) Second, to enable the persons intending to deal with the company to know with certainty as to whether the contractual relationship which they intend to enter into with the company is within its corporate objects or not [Cotman v. Broughman, (1918) A.C. 514] Thus, Memorandum gives protection not only to the shareholders but also to persons who intend to deal with the company. 2.3.3.3. Form of memorandum [section 14] According to Section 14, the Memorandum of Association of a company must be in one of the forms given in Schedule I as may be applicable to the case of the company or in a form as near thereto as circumstances admit. The Tables in Schedule I to the Act specify the following forms applicable to different types of companies as under: Table B : Memorandum of Association of a Company Limited by Shares. Table C: Memorandum Association of a Company Limited by Guarantee and not having a share capital Table D: Memorandum of Association of a Company Limited by Guarantee and having a share capital Table E: Memorandum of Association of an Unlimited Company. 2.3.3.4. Printing and signature of memorandum [section 15] The memorandum must be (a) printed (b) divided into paragraphs numbered consecutively, and
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(c) signed by at least 7 persons in case of a public company and by at least 2 persons in case of a private company. The persons signing the Memorandum are known as subscribers to the Memorandum. - Each subscriber must give his address, description and occupation (if any). - The signature of each subscriber must be attested in the presence of at least one witness. - The witness must attest the signature and add his address, description and occupation (if any). 2.3.3.5. Contents of memorandum [section 13] The memorandum of association of a company must state the following clauses: 1. The Name Clause 2. The Registered Office Clause 3. The Objects Clause 4. The Territorial Limit Clause 5. The Liability Clause 6. The Capital Clause and 7. The Subscription Clause Let us know about each of the aforesaid clauses in detail. 2.3.3.6. Name clause 1. Legal Requirements (a) Last Word [Section 13(1)(a)]: The Memorandum of every company must state the name of the company with the word Limited as the last word of the name in the case of a Public Limited Company and with Private Limited as the last words of the name in the case of a private limited company. Exception in Case of Licensed (Associations Not for Profit) Companies [Section 25] The Central Government may give license direct that a non-profit making association be registered as a company with limited liability without the addition of the word Limited or the worlds Private Limited. A non-profit making association is an association which (i) is formed for promoting commerce, art, science, religion, charity or any other useful object. (ii) intends to apply its profits / income in promoting its objects, and (iii) Prohibits the payment of any dividend to its members. (b) Undesirable Name to be avoided [Section 20 (1)]: The name must not be undesirable in the opinion of Central Government. The name shall be considered as undesirable if (i) It is identical with or too nearly resembles the name of an existing company [Section 29(2)(i)] or a registered trademark, or a trade mark which is subject of an application for registration of any other person under the Trade Marks Act 1999 [Section 20(2) (ii)].
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However, the Central Government before deeming a name as undesirable under Section 20(2)(ii) consult the Registrar of Trade Mark [Section 20(3)]. In Society of Motor Manufacturers and Traders Ltd., v. Motor Manufactures and Traders Mutual Assurance Co. Ltd., (1925) 1 Ch. 675, where a company was incorporated to conduct the business of motor vehicle assurance under a name somewhat similar to that of a motor dealers trade protection association, the court refused an injunction to the association because the difference between the activities of the company and the association precluded any possibility of confusion. In Ewing. v. Buttercup Margarine Co., (1917) 2 Ch. 1, Ewing was carrying on business under the name of Buttercup Dairy Company as a wholesale and retail provision merchant. A new company, Buttercup Margarine Co., was formed with the object of manufacturing and selling margarine in wholesale. Ewing applied to the court for restraining the new company from using the name, contending that it was calculated to deceive and that people were likely to be confused into thinking of both companies as one or closely related. The court granted an injunction. The court, however, will not grant an injunction to prevent the use of a purely descriptive word with a definite meaning and in common use. In Aerators Ltd., v. Tollit, (1902) 2 ch. 319, the business of the plaintiff was the sale of apparatus by which small quantities of liquids could be aerated. The defendant proposed to register a company to be called Automatic Aerators Limited, the object of which was to work under patents in respect of aeration of liquids in large quantities. The court did not grant the injunction as both companies had different patents and apparatus although the main object of both was to manufacture apparatus for the instantaneous, automatic aeration of liquids. (ii) It is prohibited by the Emblems and Names (Prevention of Improper Use) Act, 1950. This Act prohibits the use of the name and emblems of the United Nations and the Word Health Organization, the official seal and emblems of the Central and State Governments, the Indian National Flag, the name and pictorial representation of Mahatma Gandhi and the Prime Minister of India. (iii) It is in the contravention the guidelines issued by the Department of Company Affairs (Govt. of India). (c) Publication of Name and Address [Section 147] i. The name and the address of the registered office must be painted or affixed on the outside of every office or place of business in legible characters of one of the languages in general use in that locality. ii. The name and address of the registered office must be mentioned in legible characters in its entire business letters, bill heads, letter papers, notice and other official publications. iii. The name must be engraved in legible character on its seal.
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iv. The name must be mentioned in all bills of exchange, hundies, promissory notes, endorsements, cheques and orders for money or goods, bills of parcels, receipts and letters of credit. 2.3.3.7. Registered office clause [section 13(1) (b) and section 146] Legal Requirements a) Name of the State [Section 13(1)] The Memorandum of every company must state the name of the State in which the registered office of the company is to be situated. It may be noted that the exact address of the registered office need not be stated in the Memorandum. b) Time Limit within which the Company must have its Registered Office [Section 1456 (1)] A company must have a registered office as from the day on which it commences business or as from the 30th day after the date of its incorporation whichever is earlier. c) Notice of situation [Section 14(2)] Notice of the situation of the registered office and of every change therein must be given to the Registrar (otherwise than through a statement as to the address of the registered office in the Annual Report) within 30 days of the date of the incorporation or of the date of change. Importance All communications and notices are to be addressed to the registered office [Section 146 (1)]. Every company must keep proper books of account at its registered office [Section 209 (1)]. The domicile and the nationality of the company and the jurisdiction of the court are determined by the situation of its registered office. 2.3.3.8. Objects clause [section 13(1) (d)] The Company registered after the commencement of the Companies (Amendment) Act, 1965 must divide its object clause into two subclauses, namely: (a) Main Objects This sub-clause covers the following two: (i) Main Objects of the Company to be pursued on its incorporation, and (ii) Objects incidental or ancillary to the attainment of the main objects (b) Other Objects This sub-clause covers the other objects which are not included in Main Objects. Notes: i. If more than one activity is proposed to be pursued, a separate paragraph should be provided for each activity. ii. Under Objects incidental or ancillary to the attainment of main objects all activities essential for the attainment of main objects such as opening of a bank account, appointment of agents, officers, purchase and sale of raw material and finished goods etc. are to be included. iii. The test to be applied whether a power is implied or not, is not the benefit which the transaction is expected to confer on the company but whether it can reasonably be regarded as arising from the main object
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of the company. In case of London Country Council v. Attorney (1902) A.C. 165, the council having a statutory power to work tramways was restrained from running omnibuses in connection with the tramways. The court held that the council could not undertake the omnibus business as it was in no way incidental to the business of working tramways, however beneficial it might prove to the original business. In case of Evans v. Brunner Mond & Co., (1921) 1. Ch. 359, where a company expended money on scientific research while its main object was the business of chemical manufacturing, it was held that the act was conducive to attainment of the main object of the company and therefore very much within its powers. (iv) Wherever the object clause includes the words such as to do all such things as are incidental or ancillary to the attainment of the main objects, these words do not increase the area of the companys express powers as defined by the Main objects. These words should be constructed as being limited to the doing of such things as are legitimate necessary to the attainment of the objects previously specified. (v) In case of companies (other than trading corporation), with object not confined to one state, the states to whose territories the object extends. [Section14 (1) (e)] Restrictions on the Selection of Objects The subscribers to the memorandum may choose any objects for the purposes of their company subject to the following restrictions: a. The objects must not including anything which is illegal or contrary to general law e.g. floating a company for dealing in lotteries [Exparte More, (1931) 2 K.B. 197] b. The objects must not include anything which is against public policy e.g. trading with alien enemies [Daimler & Co., v. Continental Tyre Co., (1916) 2 A.C. 307] or objects which are in restraint of trade [Mac. Ellis v. Calligot etc., Company, (1919) A.C. 459]. c. The objects must be not including anything which is prohibited by the Companies Act, 1956. Importance of Objects Clause The objects clause is of fundamental importance to its members as well as its non-members. In the first place, it gives protection to subscribers (members) who learn from it the purposes to which their money can be applied. In the second place, it gives protection to outsiders dealing with the company who learn from it what its gives protection to outsiders dealing with the company who learn from it what its powers are and what is the range of its activities. The narrower the objects appended in the memorandum, the lesser is the subscribers risks, the wider these objects, the grater is the security of those who transact business with the company.
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2.3.3.9. Liability clause [section 13(2)] The liability clause states the nature of the liability of members. The legal requirements regarding this clause in respect of various types of companies are as follows:
Type of company 1. In case of an unlimited Company Specific regulation required Its Articles must state the number of members with which the company is to be registered and it has a share capital, the amount of share capital with which it is to be registered.[Section 27(1)] Note: Its Articles must be in the Form given in Table E. 2. In case of a company limited by guarantee but not having share capital Its Articles must state the number of members with which it is to be registered. [Section 27(2)] Note: Its Articles must be in the Form given in Table C. 3. In case of a company limited by guarantee and having share capital Its Articles must state the number of members. [Section 27(2)]. Note: Its Articles must be in the Form given in Table D. 4. In case of a Private Company having share capital Its Articles must contain the following Four restrictions as contained in Section 3(1)(iii)-(a) Restricting the right to transfer its shares (b) Limiting the number of its members to 50 excluding the past and present employees of the company (c) Prohibiting any invitation to the public to subscribe for any shares in or debentures of the company. [Section 27(3)] (d) Prohibiting any invitation or acceptance of deposits from persons other than its members, directors or their relatives. 5. In case of a Private Company having no share capital Its articles must contain the following three restrictions as contained in Sub-clauses (b), (c) and (d) of Section 3(1) (iii): a) limiting the number of its members to 50
Notes : i. In case of an unlimited company, liability clause is not required. ii. In a limited company, the liability of directors or of any director or manager may be mad e unlimit ed by p ro viding so in t he memorandum. [Section 322]
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iii. Where a company has carried on business with fewer members than the statutory minimum for more than 6 months, every member who is aware of this fact is severally liable for the entire debts of the company contracted after a period of 6 months and may be severally sued therefore. [Section 45] 2.3.3.10. Capital clause [section 13(4)] In case of limited companies by shares, this clause must state the amount of share capital with which the company is to be registered and the division thereof into shares of fixed amount, Such capital is called Authorized or Nominal or Registered capital. The fixed amount of a share is known as Par or Nominal value of a share. The amount of authorized capital should be sufficiently high considering the immediate need of the business and possible expansion in the near future. The stamp duty and registration fee are payable on the basis of amount of the authorized capital. Notes: i. In case of an unlimited company having a share capital, the capital clause is not required in its memorandum. But Section 27(1) provides that the amount of share capital with which the company is to be registered must be stated in the Articles of Association of an unlimited company having a share capital. ii. In case of company having no share capital, the capital clause is not required in its memorandum. iii. Division of the authorized capital into different classes of shares (if any) and the rights of various clauses of share holders need not be stated in the capital clause. Instead, these details may be given in the Articles of the company. iv. The effect of capital clause is that the company cannot issue more shares than are authorized for the time being by the memorandum. 2.3.3.11 Association or subscription clause (sections 12(1), 13(4)(B), (C) and 15(C) Legal Requirements a. Each of the subscribers must give in his own handwriting his name with surname, address, description (by the name of father, husband or wife as the case may be), [Section 15(C) b. In case of a company having share capital the each of the subscriber must also write in his own handwriting opposite to his name, the number of shares agreed to be subscribed by him. Each subscriber must take at least one share. [Section 13(4) (b), (c)] c. that such declaration must be signed by at least 7 persons (in case of a public company) or 2 persons (in case of a private company). [Section 12(1)] d. that an agent may sign the memorandum of association on behalf of subscriber if he is authorized by a power of attorney to do so. e. that the signatures of the subscribers must be attested by at least one witness who must not be from among the subscribers. [Section 15 (c)
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f.
that each of the witness must give in his own handwriting, his name, with surname, the description and occupation, if any. [Section 15 (c)] g. Such clauses must be strictly in accordance with standard formats. Specimen of Subscription Clause in Case of Memorandum of a Company having a Share Capital We the several persons, whose names and addresses are subscribed, are desirous of being formed into a company in pursuance of the Memorandum of Association and we respectively agree to take the number of shares in the capital of the company set opposite to our respective names. 2.3.3.12. Alteration of the memorandum A company may alter the conditions contained in this memorandum in the cases, in the mode and to the extent for which express provision is made in the Act [Section 16(1). Let us now discuss the procedure for making alterations in the different clauses of the memorandum. 2.3.3.13. Alteration of the name Procedure for Changing the Name The procedure for changing the name of the company is given below:
Case (i) Where the only change in the name of the Company is the deletion there from the words private consequent on the conversion of a private company into a public company. [Proviso to Section 21)] (b) A copy of resolution is required to be filed with the Registrar within 30 days of passing the resolution. (ii) Where the only change in the name of the company is the addition thereto the words private consequent on the conversion of a public company into a private a company. [Proviso to Sections 21 and 31 (1)] (a) The company may change its name by passing a special resolution. However, to alter the Articles in this case, the approval of Central Government would be necessary in addition to special resolution. (b) A copy of resolution is required to be field with the Registrar within 30 days of passing the resolution. (c) A copy of order of the Central Governments approval is required to be filed with the Registrar within 3 months of the order. (iii) To change the name which is identical (a) The company may change its name by Legal Requirements (a) The company may change its name by passing a special resolution at a general meeting of the members.
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(iii) To change the name which is identical with or too nearly resembles the name of an already registered existing company or on an application by registered proprietor of a trade mark, is in the opinion of Central Government identical with or too nearly resembles,

(a) The company may change its name by passing an ordinary resolution and with the previous approval of the Central Government signified in writing. (b) A copy of resolution is required to be field with the Registrar within 30 days of passing the resolution.
Note : Application by a registered proprietor of trademark should be considered after 5 years of the registration of the company. [Proviso to Section 22(1)] 2.3.3.14. Registration of Change of Name [Section 23] The provisions relating to the registration of change of name are given below: a. A copy of the resolution passed at the general meeting must be filed with the Registrar within 30 days of passing the resolution b. A copy of the order of the Central Governments approval (whenever if any required) must be filed with the Registrar within 3 months of the order. c. The Registrar shall enter the new name on the Register in the place of the former name and shall issue a fresh certificate of incorporation with the necessary alterations embodied therein. [Section 23 (1)] d. The change of name shall be complete and effective only on the issue of such a certificate. [Section 23 (1)] e. The Registrar shall also make the necessary alteration in the Memorandum of association of the company. [Section 23 (2)] f. The change of name shall not affect any right or obligations of the company. [Section 23(3)] g. The change of name shall not render defective any legal proceedings by or against it. Any legal proceedings which might have been continued or commenced by or against the company by its former name may be continued by its new name. [section 23(3)] 2.3.3.15. Alteration of registered office Procedure for changing the Registered Office The procedure for changing the registered office of the company is given below:
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Case (i) Change from one place to another within the same city, town or village [Section 146(2)]

Legal Requirements (a) A resolution of the Board of Directors is required to be passed.
(b) Notice of new location must be given to the Registrar within 30 days of the change [Section 146(2)] (ii) Change from one city, town or village to another within the jurisdiction of the same Registrar of Companies within the same State. (a) Special Resolution A special
resolution is required to be passed at a general meeting of the shareholders. [Proviso to Section 146(2)] (b) Filling of Copy of Special Resolution with ROC. A copy of the special resolution, as aforesaid, is to be filed with the Registrar within 30 days of change [Section 146(2)]
(iii)
Change from the jurisdiction of on
e (a) Special Resolution. A special resolution is required to be passed at a general meeting of the shareholders. [Proviso to Section 146(2)] (b) Confirmation of Regional Director. Confirmation of Regional Director is to be obtained where the change is from Registrar of Companies. The Regional Director must convey his confirmation within 4 weeks from the date of receipt of application for such change. (c) Filling of Copy of Special Resolution with ROC. A copy of the special resolution, as aforesaid, is to be filed with the Registrar within 30 days in Form No. 23.
ROC to the jurisdiction of another ROC within the same State.
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2.3.3.16. Articles of Association Meaning of Articles Section 2(2) of the Companies Act defined Articles as of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act. This definition is not sufficient to explain its meaning. Let us look at some of the observation made in judicial cases 1. The Articles of Association of a company are the internal rules and regulations to the management of its internal affairs (Guinnes v. Land Corporation of Ireland, (1882)22 Ch. D. 349) 2. The articles play a part subsidiary to memorandum of association. They accept the memorandum of association as the Charter of Incorporation of the company and so accepting it, they proceed to define the duties, rights and powers of governing body as between themselves and the company at large and the mode and form in which changes in the internal regulation of the company may from time to time be made. (Ashbury Railway Carriage Co. Ltd. V. Riche, (1875) L.R. 7 H.L. 653, p. 670). 3. The document containing the articles of association of a company is a business document; hence it has to be construed strictly. It regulates domestic management of a company and creates certain rights and obligations between the members and the company (S.S. Rajkumar vs. Perfect Castings (P.) Ltd.,[1968]38 Camp. Case187) 4. The Articles of Association are in fact the bye-laws of the company according to which director and other officers are required to perform their functions as regards the management of the company, its accounts and audit. Thus, the memorandum lays down the objects for which the company is formed the article lay down rules and regulations for the attainment of those objects. Which companies are required to register its articles [section 26] According to Section 26 the following companies are required to register its Articles along with the memorandum of association: 1. An Unlimited Company (Whether Public or Private), 2. A Company Limited by Guarantee (Whether Public or Private), 3. A Private Company Limited by Shares Which company need not have its own articles [section 28] A public company limited by shares need not necessarily have its own articles. A company limited by shares may either have its own articles or it may adopt either wholly or partly Table A of Schedule I of the Companies Act. Even if it does register Articles of its own, Table A will still apply automatically unless it has been excluded or modified. In other words, there are three possible alternatives in which a public company limited by shares may adopt Articles of Association. These are:
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(i) It may adopt Table A in full; or (ii) It may wholly exclude Table A and set out its Articles in full; or (iii) It may set out its own Articles and adopt part of Table A. If such a company goes in for the first alternative, then it is not necessary to get any Articles of Association registered. It has only to endorse on the face of the Memorandum of Association that it has adopted Table A as its Articles of Association. The advantage in adopting the regulations of Table A is that its provisions are legal beyond any doubt.[Lock v. Queensland Investment & Land Mortgage Co., (1896) Cl. 397]. Specific regulation required in the articles of specific companies: As per Section 27, the specific regulations required in the Articles of specific companies are given below:
Type of company 1. In case of an unlimited Company Specific regulation required Its Articles must state the number of members with which the company is to be registered and it has a share capital, the amount of share capital with which it is to be registered.[Section 27(1)] Note: Its Articles must be in the Form given in Table E. 2. In case of a company limited by guarantee but not having share capital Its Articles must state the number of members with which it is to be registered. [Section 27(2)] Note: Its Articles must be in the Form given in Table C. 3. In case of a company limited by guarantee and having share capital Its Articles must state the number of members. [Section 27(2)]. Note: Its Articles must be in the Form given in Table D. 4. In case of a Private Company having share capital Its Articles must contain the following Four restrictions as contained in Section 3(1)(iii)-(a) Restricting the right to transfer its shares (b) Limiting the number of its members to 50 excluding the past and present employees of the company (c) Prohibiting any invitation to the public to subscribe for any shares in or debentures of the company. [Section 27(3)]
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(d) Prohibiting any invitation or acceptance of deposits from persons other than its members, directors or their relatives. 5. In case of a Private Company having no share capital Its articles must contain the following three restrictions as contained in Sub-clauses (b), (c) and (d) of Section 3(1) (iii): a) limiting the number of its members to 50
Form of articles [section 29] According to Section 29, the Articles of Association of a company must be in one of the forms given in Schedule I as may be applicable to the case of the company or in a form as near thereto as circumstances admit. The Tables in Schedule I to the Act specify the following forms applicable to different types of companies as under: Table C: Articles of Association of a company limited by guarantee and not having a share capital. Table D: Articles of Association of a company limited by guarantee and having a Share capital. Table E: Articles of Association of an unlimited company. Note: Additional matters which are not inconsistent with the provisions contained in the form in any of the Tables C, D, and E may be included in the Articles. (Proviso to Section 29) Printing and signature of articles (section 30) The articles must be a) printed, b) divided into paragraphs numbered consecutively, and c) signed by at least 7 persons in case of a public company and by at least 2 persons in case of a private company. The person signing the Articles is known as Subscribers. Each subscriber must give his address, description and occupation (if any). The signature of each subscriber must be attested in the presence of at least one witness. The witness must attest the signature and give his address description and occupation (if any). Contents of articles of association The Articles of Association of a company may contain the regulation for the attainment of objects stated in the memorandum subject to the following restrictions: a) The articles must not include anything which is illegal or contrary to general law.
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b) The articles must not include anything which is against public policy. c) The Articles must not include anything which is prohibited by the Companies Act, 1956. Articles usually contain provisions relating to the following matters: a) b) c) d) e) f) g) h) i) j) k) l) m) n) o) p) q) r) s) Share capital and right of shareholders, variation of these rights. Allotment of shares. Calls on shares and Lien on shares. Transfer of Shares. Transmission of Shares. Forfeiture of Shares. Conversion of Shares into Stock. Share Warrants and Shares Certificates. Alteration of Capital. General Meeting and proceedings thereat. Voting Rights, Voting and Poll and Proxies. Directors, their appointment, remuneration, qualification, powers and proceedings of Board of Directors . Manager/Secretary. Seal. Dividend and Reserves. Capitalization of Profits. Accounts, Audit and borrowing powers. Winding up. The extent to which Table A of Schedule I of the Act is to apply or not to apply.
Alteration of articles of association Section 31 empowers the company to alter or add to its Articles. This fundamental power of the company to alter its Article is subject to the following limitations: 1) Special Resolution: The alteration must be affected by passing a special resolution at the general meeting of the company [Section 31 (1)]. A copy of the special resolution authorizing such alteration must be filed with the Registrar within 30 days of passing the resolution and a printed copy of altered articles must be filed with the Registrar within 3 months of passing the resolution. The effect if change must be incorporated in all copies of articles of association issued after the date of alteration [Section 40]. 2) Approval of Central Government in Case of Conversion of Public Company into Private Company: No alteration having the effect of converting a public company into a private company shall have effect unless approved by the Central Government [Provison to Section 31(1)]. In this case, a printed copy of the altered articles must be filed with the Registrar within 1 month of the date of receipt of the order of approval [Section 31(2A)]. 3) Valid as if originally contained: Any alteration made in the Article shall subject to the provisions of this Act, is valid as if originally contained in the Articles. [Section 31(2)]
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4) Not inconsistent with any Act: The alteration must not be inconsistent with any provisions of the Companies Act or any other statute. 5) Not inconsistent with Memorandum: The alteration must not be inconsistent with any provisions of the Memorandum of Association. Articles being subordinate to the memorandum must not override. 6) Not inconsistent with Company Law Board (CLB) Order: The alteration must not be inconsistent with an order of Company Law Board. Where the company amends its articles on order of CLB (on Application u/s 397 or u/s 398 for relief in case of oppression or mismanagement), the subsequent alteration thereof which is inconsistent with such an order can be made by the company only with leave of the Company Law Board. [Section 404(1)]. 7) Not to permit any Illegal Thing: The alteration must not permit anything which is illegal. 8) Undertaking in Writing [Section 38]: No alteration having the effect of increasing the liability of a member shall be binding upon him unless he agrees in writing either before or after alteration. However, in case of a company which is a club/any other association, the alteration requiring the member to pay subscription/charges at a higher rate shall be binding upon him although he does not agree in writing to be bound by the alteration [Section 38]. 9) Reserve Capital: A reserve capital once created in pursuance of Section 99 cannot be unreserved but may be cancelled as a reduction of capital [Midland Railway Carriage Wagon Co.(1907) W.N. 175]. 10) Retrospective Effect: The alteration may be regarded as having a retrospective effect so long as it does not affect the things already done by the company and alteration is for the benefit of the company as whole [Allen v. Gold Reef of West Africa (1909) S.C. 732]. In the case of Allen v. Gold Reef of West Africa, the original Articles gave the company a lien on all shares not fully paid-up for calls due to the company. S was the only member holding some fully paidup shares, but he also owed money to the company for calls due on other shares. S died and his shares were inherited by his legal representatives. The company, thereafter, altered its Articles enabling the company to exercise lien on all shares, whether fully paid or not. Now the question arose whether the company could exercise lien even on fully paid-up shares. It was held that company could do so as it was done bona fide for the benefit of the company as a whole. 11) Bona Fide: The alteration must be a bona fide for the benefit of the company as a whole. Such alteration shall be valid even though the private interests of some members may be affected adversely. In case of Sidebottom v.Kershaw, Leese & Co. Ltd.(1920) 1 Ch. 154], the alteration of articles empowered the directors to require any member who carried on a business competing with that of the company to sell his shares at a fair price to persons nominated by the directors. The validity of the resolution was challenged on the ground that the alteration will not be for the benefit of the company as a whole.
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The Court held that it was in the interest of the company as a whole to be protected against competition and upheld the resolution. The court was of the view that it was very much in the interest of the company as to get rid of such members who were carrying on a competing business as they always had the chance to exploit the companys secrets for their personal benefit and at its cost. 12) Not to constitute a Fraud on Minority: The alteration must not constitute a fraud on minority. An alteration has the effect of which is to discriminate between the majority shareholders and minority shareholders so as to give the former an advantage of which the latter have been deprived, would constitute a fraud on minority. In Menier V.Hoopers Telegraph Works Ltd. (1874) 9 Ch. App 350, Two Companies A and B were in rivalry. The Majority shareholders of company A were also the shareholders of Company B. Company A had filed a suit against Company B. Later, shareholders of company A passed a resolution to compromise the action against Company B in such manner that the terms of compromise were favourable to Company B and unfavourable to Company A. The minority shareholders questioned the power of the majority to make the said compromise and the court set aside the same. It observed: It would be a shocking thing, if that could be done and that majority should have nothing to do with it, then the majority have put something in their pockets at the expense of the minority. Re Cook V.Deeks (1916) AC 554, the directors of railway construction company obtained a contract in their own names to construct a railway line. The contract was obtained under circumstances which amounted to breach of trust by the directors who then used their voting powers to pass a resolution of the company declaring that the company had no interest in the contract. It was held that the benefit of the contract belongs in equity to the company and that the directors could not benefit themselves at the expense of the minority. If it were checked, this would be tantamount to allowing a majority to oppress the minority. In Brown V. Briish Abrasive Wheel Co., (1919) I Ch. 290, the majority shareholders holding 98% of the shares were willing to subscribe further capital which the company badly needed but only if they were able to acquire the shareholdings of the minority. They passed a special resolution to alter the articles to enable them to purchase the minority shares compulsorily on certain terms. The plaintiff refused to sell its shares and challenged the validity of the majority resolution. It was decided that the alteration was not for the benefit of the company, but for the benefit of the majority and accordingly an injunction was granted against the company prohibiting it from carrying out the resolution. 13) Not to cause Breach of Contract with an Outsider: Alteration must not cause a breach of contract with an outsider. The company shall remain liable for damages for its breach. Murac Rubber Syndicate v.Alperton Rubber Co.Ltd. (1915) Ch. 186. In this case an agreement was made between Company A and
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Company B. Company A had the right to nominate two directors on Company Bs board as long as company A held 5,000 shares in Company B. This was incorporated in the articles. Company A nominated two persons as directors and they were disapproved by Company B. Company B also made an attempt to alter the clause of articles which provided Company A the right of nomination. The court granted on injunction restraining Company B from making the said alteration on the ground that it would constitute a breach of contract with an outsider. But later in case of Chttambram Chettiar v. Krishan Aiyangar, I.L.R. 30 Mad. 36, it was held that a company may alter its articles even if it causes breach of contract with the outsider. It has statutory power to do so. Where the contract with the outsider is wholly dependent on articles, alteration would be operative, and accordingly, the person accepting appointment purely on the terms of the articles takes the risk of those terms being altered, and will be bound by the altered article. But the situation will be different if apart from the articles, there is an independent contract. In Southern Foundries Ltd. V.Shirlaw, S was appointed Managing Director in a company for ten years by an agreement dated 21.12.1933. Subsequently, the company was amalgamated with another company and new articles were adopted. The latter gave power to the company to dismiss a director and accordingly S was removed from office as director and the company treated him as having ceased to be one. He sued the company for wrongful repudiation of the contract. It was held that dismissal was breach of contract and therefore the company was liable for damages. 14. Not to take Away Statutory Power to Alter The powers to alter articles of association is a statutory power and it cannot be taken away by any provision in the memorandum of articles {Walker v. London Tramways Co., (1879) 12 Ch.D.705) Distinction between memorandum and articles The Memorandum of Association differs from the Articles of Association in the following respects:
Basis of Distinction 1.Contents Memorandum of Association It contains the fundamental conditions upon which alone the company is allowed to be incorporated It is Fundamental document. Every company must have its own memorandum. It defines the relationship between the company and outsiders. The memorandum cannot Articles of Association It contains the internal rules and regulations relating to management of internal affairs.
2. Fundamental / Subordinate document 3. Compulsory or optional
4.Relationship defined
5. Alteration whether
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It is subordinate to the Memorandum A public company limited by shares need not have its own Articles. It may adopt Table A as its articles. It defines the relationship between the company and its members as members only and as members inter se. Articles can be easily altered by
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5. Alteration whether easy or difficult The memorandum cannot be so easily altered. The company has to follow the strict p rocedure for the alteration of its clauses. In some cases alteration requires the approval of the Company Law Board. An act which is beyond the powers g iven in the Memorandum us ultra vires and void and it cannot be ratified even by the unanimous consent of all the members. In case of the contracts ultra vires the memorandum, outsiders have no remedy against the company.

Articles can be easily altered by passing a special resolution.
6. Binding Effect of ultra vires act
An act is intra vires the Memorandum but ultra vires the Articles may be ratified by share holders by passing a special resolution.
7. Remedy in case of ultra vires contracts
In case of contracts ultra vires the Articles, the outsiders can enforce the contract against the company provided they had no knowledge of irregularity.
Binding effects of memorandum and articles (section 36) Section 36 provides that the Memorandum and Articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the Memorandum and of the Articles. Thus, the Memorandum and Articles constitute a binding contract between the company and each of its members. The legal effects can be studied under the following headings: 1. Members bound to the Company Since the Memorandum and Articles constitute a contract between the members and the company, the members are bound to the company by whatever is contained in these documents. Accordingly, the company is entitled to sue its members for enforcement of the articles and can restrain its members through court from violating any provisions contained therein. In case of Borelands Trustee v. Steel Brothers and Co. Ltd. {(1901) 1 Ch. 279} the articles of company provided that the shares of any member who became bankrupt would be sold to other persons at a price fixed by the directors B, a shareholder became bankrupt and his trustee in bankruptcy claimed that he was not bound by the articles and could therefore, sell those shares at their true value. But it was held, that the trustee in bankruptcy was bound by the Articles as it constituted a binding contract between the members and the company. Similarly in case of Bradford Banking Company v. Brigs, (1886) 12 A.C. 29, where the articles give the company a lien upon each share for debts due by shareholders to the company, and where a shareholder mortgages
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his shares and the mortgagee serves notice thereof upon the company, the mortgagee would have priority over the company, only if the shareholder had incurred a liability to the company after the notice of the mortgage was given to the company. If, on the other hand, the shareholder had incurred a liability before the notice of mortgage was given to the company, the company would have the priority. 2. Company Bound to the Members Since the memorandum and articles constitute a contract between members and the company, the company is bound to its members by whatever is contained in these documents. Accordingly, the members are entitled to sue the company for enforcement of the Articles and can restrain the company through court from violating any provisions contained therein. Views differ on the questions as to whether and how far the memorandum and articles bind the company to the members. The views expressed in various judicial cases are given below: a) The company is bound to the extent that any member can sue it so as to prevent any beach of the article which is likely to affect his right as a member of the company. {Hickman v. Kent Sheepbreeder`s Association }(1885) 1 Ch. 88) Thus, An individual member can file a suit against the company to enforce his individual rights e.g. right to contest election for directorship of the company, right to get back his shares wrongfully forfeited, right to receive a share certificate, notice of general meeting etc. {Pender v.Lushirgton (1817) Ch.D.70, Nogaffa v. Madras Race Club, AIR 1951 Mad. 83, C.L.Joseph v. Los, AIR 1965 (Ker.) 68} b. The member suing in such cases sues not in the right of a member but in his own right to protect from invasion of his own individual right as a member {Edwards v. Halliwell,(1950) 2 All ER 1964 at p. 1067] c. In case of Johnson v. Lyttle Iren Agency,(1877) 5 Ch. D. 687, a forfeiture of shares irregularly effected by a company was set aside at the instance of the aggrieved member as the company did not comply with the provisions of the Articles. d. In case of Wood v. Odessa Water Works, 6 (1884) 42, Ch. D.636, the articles empowered the company to declare a dividend to be paid to the shareholders with the approval in the general meeting. A resolution was passed to pay the dividend by issue of debenture bonds and not in cash. At the instance of a member, the court granted an injunction restraining the director from acting on the resolution. e. Thus, the member can sue the company for the breach of the Articles in the following cases : a) When the company does an ultra vires illegal act, b) For the enforcement of personal rights e.g. right to receive declared dividend, c) when majority plays fraud on minority and d) for submitting the petition to court for its orders for preventions of oppression and mismanagement under sections 397 and 398.
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3.
Between Members inter se Although there is no express agreement between the members of company, yet articles regulate their rights inter se. Such rights can only be enforced by or against a members through the company or through the liquidator representing the company but no members has as between himself and another member any right beyond that which the contract with the company gives him {Weltan v. Saffary (1897) A.C.315]. But the contrary view was taken in case of Royfield v. Hands and others, (1852) 2. W.L.R. 851. In this case, the articles provided that every member who intends to transfer his shares must inform the directors and directors must take the said shares equally between them at a fair value. The plaintiff informed the directors of his intention to transfer his shares. But the directors refused to take the shares and argued that the articles could not impose such obligation upon them in their capacity as directors. The court held that the directors were bound to take the shares since the articles imposed obligation upon them in their capacity as members and thus obligation was personal one which could be enforced against them by other members directly without joining the company as a party. It may also be noted that the articles constitute a contract between members only as regards matters arising out of the company relationship of members as members. They cannot regulate rights arising out of any other contracts in which other members have no interest. In case of Khusi Ram v. Hanut Mal (1949) 53 C.W.N. 305, where a member had a commercial dispute of private nature with another member, an arbitration clause in the articles of the company was not allowed to be invoked.
4.
Between the Company and Outsider Since the Memorandum and Articles do not constitute a contract between the company and outsider, an outsider is not entitled to sue the company for enforcement of the Articles even if the articles provide certain rights to him. The following case of Eley v. Positive Government Life Assurance Co. Ltd., (1876) 1 Ex. D. 88 illustrates this point. The Articles of the company contained a provision that Eley would be the solicitor of the company for life and would not be removed from office except for misconduct. Eley acted as solicitor to the company and also became a member of the company. The company, however, terminated his services. Thereupon, he sued the company of damages for breach of contract. Held, the Articles cannot be the basis of a contract between the company and an outsider. It would be noted here that he was trying to exercise his right as an employee and not as a member. A person can be a member of the company and at the same time may be creditor or employee of the company. In the above case, he was trying to exercise his right as an employee of the company. There was no independent contract between the company and Eley apart from whatever was contained in the Articles. Therefore, his suit was dismissed.
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Similarly in case of Re Rotherham Alum & C0., (1883) 25 D. 103, where the articles provided for remuneration to be paid to promoters, it was held that this clause did not give any right of action to promoters against the company. It may also be noted that where articles are deemed to have formed a part of outsiders contract with the company, the outsider is entitled to maintain a suit on the basis of that contract. In case of Re. New British Iron Co., (1898) 1 Ch. 324, where an individual entered into a contract with a company to serve as a director and the articles of the company required the director to have a share qualification and fixed his remuneration, it was held that director was entitled to recover his remuneration as fixed by the articles because the terms of articles were deemed to have formed a part of his contract with the company. Though the articles and memorandum do not constitute a contract between the company and an outsider, still the outsider is entitled to assume that all the necessary formalities have been duly complied with in internal workings of the company. {The Royal British Bank v. Turquand} Doctrine of constructive notice Since the Memorandum and Articles of Association on their registration with the Registrar, become public documents and are available for public inspection in the Registrars office on payment of prescribed fee (Section 610) every person dealing with the company is presumed to have the knowledge of the contents of these documents and also to have understood them according to their proper meaning. [earnest v. Nicholls (1857) 6 H.I.C. 401, Griffith v. Poget, (No.2) (1877) 6 Ch. D. 517, Oak Bank Oil v. Crum, (1882) 8 A.C. 65]. This type of presumed knowledge of these documents is termed as Constructive Notice of Memorandum and Articles of Association. Accordingly, if a person supplies goods to a company in which it cannot deal according to its objects clause, he will not be able to recover the price from the company. The supplier cannot in his defense take the plea that he did not have the knowledge of the contents of the memorandum of Association of the Company. Thus, if a person enters into a contract which is ultra vires the company, he must do so at his peril. The doctrine of constructive notice is not a positive one but a negative one like that of estoppels of which it forms part. It operates only against the person who has been dealing with the company but not against the company itself. Consequently, he is prevented from alleging that he did not know that the constitution of the company rendered a particular act or particular delegation of authority ultra vires. Thus, this doctrine is a cloud for the strangers. Principle of ostensible authority A third party dealing with the company in good faith assumes that the person who is dealing with him has the required authority to deal on behalf of the company. For example if a person is dealing with a director
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in a matter in which normally a director have power to act for the company, then that person can presume that latter has ostensible authority or apparent authority on that matter on behalf of the company. Person dealing with the company is not under obligation to inquire that whether the person to whom which he is dealing really has the authority. In such cases, it is not material whether the person concern should at least have ostensible authority e.g. a purchase manager can be said to have ostensible authority to issue purchase orders, but he cannot have ostensible authority to sign cheques on behalf of the company. Notes : i) The director repaid his personal loan through the companys account by using company cheques. The lender knew from the cheques that the amount is from company account and not from his personal account. In this case the acts of director are ultra vires. A director cannot be presumed to have ostensible authority to repay his personal loan from company account. Hence, lender is liable to repay the amount to the company. ii) A director has no ostensible authority to institute a suit on behalf of the company. Such authority has to be specifically conferred by a resolution [Indian Commerce v. Swadharma Swarajya Sangha (19980]. iii) Filing of suit cannot be done with specific authority [BOC India v. Zinc Products (1997)]. iv) Suit filed by the secretary under general power of attorney, later ratified by Board is valid [Turner Marrison & Co, V. Hunger Ford Investment, 42 Comp Cas 512 (SC) 85 ITR 607, AIR 1972 SC 1311]. Doctrine of Indoor Management Meaning of Doctrine of Indoor Management The doctrine of indoor management is an exception to the doctrine of constructive notice. This doctrine protects the outsiders against the company by entitling them to assume that the provision of the Articles of Association have been duly complied with by the company in its internal working. This doctrine is based on the principles of justice and public convenience. In case of Pacific Coast Mines Ltd. V. Arkuthnd, (1971) A.C. 607, the Court held An outsider is presumed to know the constitution of a company but not what may or may not have taken place within the doors that are closed to him. Therefore, if the contract is within the powers of the company, then company will be bound to the outsider and will not be allowed to escape liability by showing that there was some irregularity in following procedure. This is known as the Doctrine of Indoor Management or Rule in Royal British Bank v. Turquand (1856) 6 E & B 327. The facts of this case are as follows:
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The directors of a company were authorized by the articles to borrow on bond such sums of money, as authorized from time to time, by a resolution of the company, in General Meeting. The directors borrowed money from Turquand and issued a bond to him. No resolution of the company, as was required to be passed according to the Articles of Association was passed. Decision, Turquand could sue the company on the bond, as he was entitled to assume that the resolution of the company in General Meeting authorizing the directors to borrow money on the basis of bond had been passed. Exceptions to the Doctrine of Indoor Management The doctrine of indoor management is subject to the following limitations: Let us discuss these exceptions one by one.
Exception to the Doctrine of Indoor Management
Knowledge of Irregularity
Suspicion of Irregularity
Forgery
No knowledge Acts beyond of Articles Apparent Authority
1. Knowledge of Irregularity Where the person dealing with the company has knowledge of an irregularity regarding the internal management of the company, he cannot claim protection provided by this doctrine. The knowledge of irregularity may be actual or constructive. In this connection the case of Howard v. Pokent Ivony Co. is relevant. The directors were empowered to borrow money up to $1,000 sanction of the shareholders was required for an amount in excess of this. The directors themselves lent to the company an amount in excess of the borrowing powers without the consent of the shareholders. It was held that the directors had the notice of the internal irregularity and therefore the company was liable to them only for $1,000. 2. Suspicion of Irregularity Where the person dealing with the company is put upon an enquiry, he cannot claim protection under this doctrine in the circumstances under which he would have discovered irregularity if he had made the proper enquiries. In case of Underwood v. Bank of Liverpool (1924) I.K.B. 775, the sole director paid a cheque drawn in companys name, into his own bank account. It was held that the bank was put upon inquiry and was not entitled to rely upon the ostensible authority of the director. Likewise, a person dealing with the company may be put upon enquiry by reason of the unusual magnitude of the transactions having regard to the position of the agent who is acting for the company. [ Houghton & Co. v. Nothard Howe & Wills, [(1917) I.K.B. 147, 149] 3. Forgery A person dealing with the company cannot claim protection under this doctrine where forgery is involved. A company cannot be held liable
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for forgeries committed by its officers. In case of Rubben v. Great Fingal Consolidated (1906) AC. 439, the secretary of the company issued a share certificate in favour of Rubben by forging the signatures of two directors under the seat of the company. R wanted to be registered as a member but the company refused to register him as a member. R contended that since signatures were part of internal management and he had no means to ascertain the genuineness of the signatures, therefore he should be protected. The court held that the share certificate is not binding on the company since the doctrine of indoor management applies to irregularities and not illegalities (i.e. forgery). 4. No knowledge of Articles Where the person dealing with the company has no knowledge of articles, he cannot claim protection under this doctrine since this doctrine is based on the principle of estoppels and the person who did the act without consulting the Articles, cannot be said to have relied upon the articles. The companys articles contained a clause the directors may delegate any of their powers other than the power to borrow and make calls to committee consisting of such members of their body as they think fit. One T an active director of the company entered into a contract with Rama Corporation under which he took a cheque from Rama Corp. In fact Rama Corp. had not inspected the defendants article, therefore he did not know of the existence to delegate authority. It was held that defendant company was not bound by the agreement since the power was never delegated to T. In the opinion of Justice Slade, J. the knowledge of article is essential because the rule of Indoor management is based upon the principle of estoppels. He observed, A person who at the time of entering into a contract with a company, has the knowledge of the companys Articles of Association, cannot rely on those articles as conferring ostensible or apparent authority of the agent of the company with whom he dealt. 5. Acts beyond Apparent Authority Where an officer of the company does something, which would not ordinarily be within his powers, the person dealing with him must make proper inquiries and satisfy himself as to the officers authority. If he fails to make proper inquiry in spite of suspicious circumstances, he cannot claim any protection under the doctrine of indoor management. In case of Anand Bihari Lal v. Dinshaw & Co., AIR (1942), the accountant of the company transferred some property of the company to the plaintiff. The transfer was held by the court to be void, because the power to transfer property could not be considered within the apparent authority of the accountant. The plaintiff were put upon an enquiry before entering into the transaction as they should have insisted on seeing the power of attorney executed in favour of the accountant. Even a delegation clause in the Articles is not enough to validate the transaction unless the accountant was in fact authorised.
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Similarly in case of Kredit Bank Case v. Scchenkers, (1927), K.B. 826, where a branch manager of a bank drew and endorsed bills on behalf of his company without any authority, it was held that drawing of bills was not within the oridinary ambit of power of this branch manager and company was not bound unless such authority was in fact delegated to him. 2.3.4. Prospectus Prospectus Meaning of prospectus (section 2(36)] According to Section 2(36) prospectus means any document described or issued a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate. In simple words, the term `Prospectus` means a document which invites deposits from the public or invites offers from the public to subscribe or buy the shares or debentures of the company. Thus, a prospectus is not an offer in itself but an invitation to make an offer. Application for making a deposit or for purchase of shares or debentures constitutes an offer by the applicant to the company. It is only on the acceptance of the offer, by the company, a binding contract comes into existence. The prospectus must be in writing. An oral invitation to subscribe for as shares will not be considered prospectus. Television or film advertisement cannot be treated as prospectus. Meaning of invitation to the public (section 67] From the definition of prospectus, it is clear that a document can be regarded as a prospectus only when it invites offers from the public. According to Section 67(1) and (2), the term public includes any section of the public whether selected as members or debenture holder of the company concerned or as clients of the person issuing the prospectus or in any other manner. According to Section 67(3), no offer or invitation shall be treated as made to the public in either of the following two circumstances: 1. If it is not calculated to result in the shares/debentures becoming available by persons other than those receiving the offer or invitation. 2. If it can properly be regarded as being a domestic concern of the persons making and receiving the offer or invitation. Thus, in determining whether or not an offer has been made to the public, the test is not who receives the offer or the invitation but who can accept it. If the invitation can be accepted by any one whether the prospectus was addressed to him or not, then it should be regarded as invitation being made to the public. If the invitation can be accepted only by those to whom it has been made, then it should not be regarded as invitation being made to the public. Some of the decided cases are given below:
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a. An offer by directors to a few of their friends, relatives, customers by sending them a copy of prospectus marked not for publication was not considered an offer to the public {Sherwell v. Combines Incandescent Syndicate (1970) W.N.110] b. An offer of shares to the kith and kin of a director is not an invitation to the public. [Rattan Singh v. Moga Transport, A.I.R.1959 Pun, 196] c. A single private communication does not amount to an invitation to the public. A managing director of a company sent to his co-director several copies of a document marked strictly private and confidential and containing particulars of a proposed issue of shares, accompanied by share application forms. One of the copies was sent by the co-director to a solicitor, who is turn, gave it to a client who passed it on to a relation. The allottee (relative of the client of the solicitor) filed a suit for compensation for the loss sustained by him by reason of an omission in the document. It was held that the document did not amount to prospectus issued to the public, as it was marked strictly private and confidential [Nash v. Lynde (1929) A.C.158] When is an offer not treated as Private Issue? [Proviso to Section 67(3)] If an offer is made to 50 or more persons, it will not be treated as private issue, i.e. it will be treated as public issue. However this provison is not applicable to a) Non Banking Finance Companies referred to in Section 45-I(f) at the RBI Act , or b) Public Financial Institutions as defined in Section 4A of Companies Act. Special Provisions for Non-banking Finance Companies (NBFC) and Public Financial Institution (PFI) [section 67(3A)]. According to Section 67(3A), NBFC and PFI can make private offer over to 50 or more members, without issuing a prospectus as per guidelines notified by SEBI in consultation with RBI. Meaning of the Term Subscription or Purchase of Shares The term subscription or purchase of shares means taking or agreeing to take shares for cash. In case of Government stock and other Securities Investment Co. Ltd. V. Charistopper (1956), All E.R. 490, an offer was made by Company X to the members of Companies Y and Z to acquire all their shares in these companies in exchange for allotment of shares in the company. It was held that the offer could not be said to have been made to the public on the following two grounds: a) It did not invite subscription for shares since subscription means taking shares for cash (as it was an exchange offer). b) It could be accepted only by members to whom it was made.
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Initial Offer of Securities to be in Dematerialized form in Certain Cases (Section 68B] Every listed public company, making initial public offer or any security for a sum of rupees ten crores or more, shall issue the same only in dematerialized form by complying with the requisite provisions of the Depositories Act, 1996 and the regulations made there under. Significance of prospectus Prospectus is an important document because of the following reasons: 1. Invitation - It serves as an invitation by the company to the public to invest through making deposit or subscribing shares or debenture. 2. Advertisement- It acts as a medium of advertisement since it informs the public about its present operations and future prospects. 3. Authentic Record -It serves as an authentic record of the terms and conditions of the issue of deposits, shares or debentures 4. Protection -It protects the interests of the investors who invest on the faith of the prospectus since any misstatement in the prospectus attracts both civil and criminal liability for persons who authorize the issue of prospectus. When prospectus is not required to be issued (section 56) The issue of a prospectus is not necessary in the following cases: 1. Where shares are not offered to the public [Section 56(3)] 2. Where a person is bonafide invited to enter into an underwriting agreement. [Section 56(3)] 3. When shares or debentures are offered to existing holders of shares or debentures. [Section 56(5)] 4. When the issue relates to shares or debentures uniform in all respects with shares or debentures previously issued and dealt in or quoted in a recognized stock exchange. [Section 56(5)] Requirements as to prospectus [section 55 to 61 and 66] The various requirements as to issue of prospectus are given below: 1. Dating of Prospectus [Section 55]-Every prospectus issued by the company must be dated. This date must be taken as to the date of the publication of the prospectus unless contrary is proved. 2. Signature of Prospectus [Section 60(1)] -A copy of prospectus to be delivered to the Registrar for registration must be signed by every person who is named in the prospectus as a director or proposed director or his agent authorized in writing. 3. Delivery of Prospectus [Section 60(1)] - A copy of prospectus must be delivered to the Registrar for registration on or before the date of publication of prospectus. 4. Endorsement or Attachment- The copy of the prospectus must have endorsed on or attached to it the following :
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a. The written consent of the expert to the issue of the prospectus, if his report has been included therein and such expert must not be connected or interested in the formation, promotion or management of the company. b. A copy of every contract appointing or fixing the remuneration of managerial personnel. c. A copy of every material contract unless it is entered into in the ordinary course of business within 2 years before the date of issue of the prospectus. d. When the persons making the reports relating to profits and losses, assets and liabilities, etc. have made adjustments to them, a signed statement by them states the adjustments and the reasons for the same. e. The written consent of the person if any named in the prospectus as the auditor, adviser, attorney, solicitor, banker of the company to act in that capacity. f. A duly signed report required by Part II of Schedule II relating to adjustments regarding the figures of any profits/losses, or assets or liabilities. 5. Matters to be stated on the Face of Prospectus [Section 60(2)]: Every prospectus must state on fact of it, a) that a copy thereof has been delivered for registration, and b) the documents required to be endorsed on or attached to the copy delivered for registration. 6. Time limit within which Prospectus is to be Issued [Section 60(4)] The prospectus must be issued within 90 days after the date on which a copy of the same is delivered to the Registrar. If it is issued after 90 days after its registration, it shall be deemed to be a prospectus a copy of which has not been delivered to the Registrar. Penalty for Issue of Prospectus without Registration [Section 60(5)] The company and every person who is knowingly a party to the issue of prospectus without registration shall be punishable with fine up to Rs.50, 000. Approval of prospectus by various agencies Authorities who Approve the Prospectus The draft prospectus is required to get approved by the following authorities before it is filed with ROC for registration. a) All the lead managers to issue (who must be authorized by SEBI); b) Each of the Stock Exchanges where the shares of the company are listed and where the shares/debentures are required to be issued; Vetting by SEBI - The draft prospectus is required to get vetted by SEBI to ensure and adequacy of disclosures. However, vetting by SEBI does not amount to approval of prospectus. SEBI does not take any responsibility for the correctness of the statements made or opinions expressed in the prospectus. Duty of ROC - The ROC must ensure that merchant bankers to the issue whether as lead manager, Co-managers, advisers or consultants
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are only those authorized by SEBI. Each merchant banker has been given a code number; ROC must not register a prospectus if prior registration, SEBI informs ROC that the contents of prospectus filed are in contravention of any law or statutory rules and regulations. Who can exercise powers in relation to issue and transfer of securities and non-payment of dividend etc. [section 55a] The following table shows the authorities who can exercise powers in relation to issue and transfer of securities and non-payment of dividend etc.
Type of Powers 1. Powers relating to issue and transfer of securities and non-payment of dividend a) In case of listed public companies b) In case of those public companies which intend to get their securities listed on any recognized stock exchange in India c) In case of any other companies c) Central Government Appropriate authority as prescribed under the Act a) Securities and Exchange Board of India (SEBI) b) Securities and Exchange Board of India (SEBI) Authority who can exercise such powers
2. Powers relating to any other matter
Powers of SEBI [section 55a] In the case of public company, which intends to list its securities on a recognized Stock Exchange, the provisions of the following sections shall be administered by SEBI. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Section 55 to 58-Matters relating to Prospectus. Section 59-Matters relating to Prospectus. Section 69-75Allotment Section 76-77B-Commission and Discounts Section 78-79A-Issue of Shares at Premium/Discount Section 80-80A-Issue and Redemption of Preference Shares Section 81Further Issue of Capital Section 82-84-Nature, Numbering and Certificate of Shares Section 108-109-110-112-Transfer of Shares & Debentures Section 113Limitation of Time for issue of share Section 116, 177Provisions relating to Debentures Section 118-122-Provisions relating to Debentures Section 206, 206A, 207Distribution/Payment of Dividend (So far as they relate to issue and transfer of Securities and non-payment of Dividend).
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Shelf prospectus [section 60a] What is Shelf Prospectus? Shelf Prospectus means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus. Who is required to File a Shelf Prospectus [Section 60A (1)] Any public financial institution, public sector bank or scheduled bank whose main object is financing, shall file a shelf prospectus. Financing means making loans to or subscribing in the capital of, a private industrial enterprise engaged in infrastructural financing or, such other company as the Central Government may notify in this behalf; Benefit of Filing Shelf Prospectus [Section 60A (2)] A Company filing a shelf prospectus with the Registrar shall not be required to file prospectus afresh at every stage of offer of securities by it within a period of validity of such shelf prospectus. Obligation of a Company Filing a Shelf Prospectus [Section 60A (3) and (4)] A company filing a shelf prospectus shall be required to file an information memorandum on all material facts relating to new charges created, changes in financial positions as have occurred between the first offer of securities, previous offer of securities and the succeeding offer of securities within such time as may be prescribed by the Central Government, prior to making of a second or subsequent offer of securities under the shelf prospectus. An information memorandum shall be issued to the public along with shelf prospectus filed at the stage of the first offer of securities and such prospectus shall be valid for a period of one year from the date of opening of the first issue of securities under that prospectus: Provided that where an update of information memorandum is filed every time an offer of securities is made, such memorandum together with the shelf prospectus shall constitute the prospectus. Information memorandum [section 60B] When Information Memorandum may be circulated [Section 60B (1)] A public company making an issue of securities may circulate information memorandum to the public prior to filing of prospectus. What is Red-herring Prospectus? Red-herring Prospectus means a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered.
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Obligations of the Company Filing Information Memorandum 1. A company inviting subscription by an information memorandum shall be bound to file a prospectus prior to the opening of the subscription lists and the offer as a red-herring prospectus, at least three days before the opening of the offer. 2. The information memorandum and red-herring prospectus shall carry same obligations as are applicable in the case of prospectus. 3. Any variation between the information memorandum and the redherring prospectus shall be highlighted as variations by the issuing company. 4. Every variation as made and highlighted in accordance with Subsection (4) above shall be individually intimated to the persons invited to subscribe to the issue of securities. 5. In the event of the issuing company or the underwriters to the issue have invited or received advance subscription by way of cash or post-dated cheques or stock-invest, the company or such underwriters or bankers to the issue shall not encash such subscription moneys or post-dated cheques or stock-invest before the date of opening of the issue, without having individually intimated the prospective subscribers of the variation and without having offered an opportunity to such prospective subscribers to withdraw their application and cancel their post-dated cheques or stock-invest or return of subscription paid. 6. The applicant or proposed subscriber shall exercise his right to withdraw from the application on any intimation of variation within seven days from the date of such intimation and shall indicate such withdrawal in writing to the company and the underwriters. 7. Any application for subscription which is acted upon by the company or underwriters or bankers to the issue without having given enough information of any variations, or the particulars of withdrawing the offer or opportunity for canceling the post-dated cheques or stockinvest or subscription moneys or cancellation of its application, as if the said application had never been made and the applicants are entitled to receive back their original application and interest at the rate of fifteen per cent from the date of encashment till payment of realization. 8. Upon the closing of the offer of securities, a final prospectus stating therein the total capital raised, whether by way of debt or share capital and the closing price of the securities and any other details as were not complete in the red-herring prospectus shall be filed in a case of a listed public company with the Securities and Exchange and in any other case with the Registrar only. Meaning of deemed prospectus or prospectus by implicating or offer for sale [section 64] Where the company allots or agrees to allot any shares or debentures to issuing house and others with a view to such shares being offered to public for sale, any document by which the offer for sale to public is
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made shall be deemed to be a prospectus issued by a company and all provisions applicable to prospectus shall apply with specified modification. [Section 64(1)] Presumption- It will be presumed that an allotment or an agreement to allot shares or debentures to the issuing houses was made with a view to offer them to public if it is shown(a) that shares were offered to the public for sale within 6 months after they were allotted or agreed to be allotted to issuing house, or (b) that the whole consideration in respect of shares/debentures had not been received by the company [Section 64(2)] Additional Matters to be Stated- In addition to the matters required by Section 56, the deemed prospectus issued by an issuing house under Section 64(1) must state the following two matters: (a) The net amount of consideration received or to be received by the company in respect of these shares or debentures. (b) The place and time at which the contract of allotment may be inspected. Application forms to be accompanied by abridged prospectus [section 56(3)] 1. Meaning form to be accompanied: Abridged prospectus means a memorandum containing such salient features of a prospectus as may be prescribed. [Section 2(1)] 2. Application form to be accompanied: Every application form for shares in or debentures of a company must be accompanied by an abridged prospectus containing all the prescribed features except in the following cases where the form of application is issued a) to persons who is Bona fide invited to enter into an underwriting agreement. [Section 56(3)(a)] b) in relation to shares or debentures which were not offered to the public. [Section 56(3)(b)] c) to existing members or debenture holders of the company whether with or without the right of renunciation. [Section 56(5)(a)] d) in relation to shares or debentures which are i) Uniform in all respects with shares or debentures previously issued, and ii) dealt in or quoted at a recognized stock exchange.[Section 56(5)(b)] The logic behind the first two exceptions is that the public are not involved, hence no needs of protection. In case of last two exceptions, the offeree being already a member for the shares being quoted one, must have enough information about the company to protect him. 3. Form of abridged Prospectus: The Government has prescribed a Form 2A of abridged prospectus. The abridged prospectus and the share application form must bear the same printed number.
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4. Duty to Furnish Prospectus: A copy of prospectus must be furnished on a request being made by any person before the closing of the subscription list [Provision to Section 56(3)]. 5. Penalty for Default [Section 56(3)]: If any person acts in the contravention of the provisions of Section 56(3), he shall be punishable with fine which may extend to Rs.50,000. Experts consent [section 57-58-59] Meaning of Expert [Section 59(2)]- The expression expert includes an engineer, a valuer, an accountant and any other person whose profession gives authority to a statement made by him. Expert to be Unconnected [Section 57]- The statement of an expert must not be included in the prospectus if he is in any way connected with the formation or promotion or management of the company. In other words, the person must be independent to function as an expert. Conditions for Issue of Prospectus Containing Experts Statement[Section 58] The statement of an expert must not be included in the prospectus unless a) The expert has given his written consent to the issue of the prospectus. b) The expert has not withdrawn such consent before the delivery of a copy of the prospectus for registration. c) A statement that he has given and has not withdrawn his consent appears in the prospectus. Penalty for Default [Section 59(2)] - Every person who is knowingly a party to the issue of prospectus in contravention of Section 57 or Section 58, shall be punishable with fine up to Rs.50,000. Terms of Contracts Mentioned in Prospectus not to be Varied [Section 61]-A company must not vary the terms of contract mentioned in the prospectus or statement in lieu of prospectus, except with the approval of the members in general meeting. Legal Significance [Section 56(2)]- Any condition in the prospectus which requires or binds an applicant for shares or debentures to waive compliance with any of the requirements relating to statutory matters and reports, shall be void. Similarly, the condition which has the effect of affecting him with the notice of any contract, document or a matter not specifically referred to in the prospectus, shall be void. Experts Right to be Indemnified [Section 62(3)]-Where an expert has given his consent to the inclusion of his report in the prospectus and has withdrawn his consent before the issue of the prospectus and in spite of this the prospectus has been issued, the directors of the company and every other person who authorized the issue of the prospectus shall be liable to indemnify the expert against all damages, costs and expenses which he may have incurred on account of his being associated with the issue of the prospectus as an expert.
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Effect of accepting application without complying with the requirements of section 56 In case the company accepts the application for shares or debentures without complying with the requirements of Section 56, the applicant can neither ask for the rescission of the contract nor the rectification of the register. But he can sue the person responsible for the issue of the prospectus for any damages which he may have suffered [South of England Natural Gas and Petroleum Co., (1911) Ch.573] Matters to be stated in the prospectus [section 56] Every prospectus must state the matters specified in Part I of Schedule II and set out the reports specified in Part II and the said Part I and Part II have effect subject to provisions contained in Part III of that Schedule. Keeping in view the requirements of Schedule II of The Companies Act, 1956 and the SEBI guidelines for disclosure and investor protection, the prospectus to be issued by companies should provide for the following matters: 1) General Information a) Name and address of the registered office of the issuer company; b) Details of letter of intent/industrial license obtained and declaration of the Central Government ; c) Name of stock exchanges where listed (if applicable) and where listing applications have been made for the issue; d) Provision of Section 68A (1) of The Companies Act, 1956 regarding fictitious applications; e) Minimum Subscription Clause: (i) For Non-underwritten Public Issues: If the company does not receive the minimum subscription of 90% of the issued amount on the date of closure of the issue, or if the subscription level falls below 90% after the closure of issue on account of cheques having being returned unpaid or withdrawal of applications, the company shall forthwith refund the entire subscription amount received. If there is a delay beyond 8 days after the company becomes liable to pay the amount, the company shall pay interest as per Section 73 of the Companies Act 1956. (ii) For Underwritten Public Issues: If the company does not receive the minimum subscription of 90% of the net offer to public including development of Underwriters within 60 days from the date of closure of the issue, the company shall forthwith refund the entire subscription amount received. If there is a delay beyond 8 days after the company becomes liable to pay the amount, the company shall pay interest prescribed under Section 73 of the Companies Act 1956. For Composite Issues: The lead Merchant Banker shall ensure that the requirement of minimum subscription is satisfied both jointly and severally, i.e., independently for both rights and public issues.
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If the company does not receive the minimum subscription in either of the issues the company shall refund the entire subscription received. Offer of sale- The requirement of minimum subscription shall not be applicable to offer for sale. ii) Public issues by infrastructure companies-The requirement of minimum subscription shall not be applicable to an eligible infrastructure company, provided disclosures regarding the alternate source of funding are made in the offer documents. iii) declaration about the issue of allotment letters or refunds within a period of 10 weeks and interest in case of any delay in refund at the prescribed rate under Section 73(2)/73(2A) of the Companies Act, shall be mentioned. iv) Dates of opening, closing and earliest closing of the issue; v) Names and addresses of lead managers, co-managers, trustees (if applicable), legal advisers to the company, auditors, bankers to the issue, brokers to the issue and the secretary. vi) Whether or not credit rating from any other recognized agency has been obtained for the proposed issue of debt (including convertible instruments) should be mentioned. If rating is obtained, it should be indicated, preferably with implications of the rating symbol. In terms of SEBI guidelines, rating of a credit agency is mandatory for debentures with maturity period of more than 18 months. vii) Underwriting arrangements made for the issue, names of underwriters, amount underwritten and declaration by Board of Directors and the lead managers that in their opinion the resources of the underwriters are sufficient to discharge their underwriting obligations. viii) Compliance Officer: a. The name, address, telephone number, fax and E-mail number and address of Compliance Officer b. The investors attention shall also be invited to contact the compliance officer in case of any pre-issue/post-issue related problems such as non-receipt of letters of allotment/share certificates/refund orders/ cancelled stock invests etc. 2. Capital Structure of the company and Issue Details (a) Authorized, issued, subscribed and paid-up capital of the company. (b) Size of the issue with break up of reservation for preferential allotment to promoters, shareholders of group/associate companies, financial institutions, mutual funds, NRI, permanent employees, etc. The lockin-period in respect of shares/debentures to be allotted to promoters and shareholders of group and associate companies/employees/ financial institutions should be mentioned. The maximum number of shares/debentures that can be allotted to each employee and the number of permanent employees in the company should be mentioned. (c) Paid-up capital after the present issue and after conversion of debentures, if applicable. (d) Securities Premium Account (before and after the issue) 3. Terms of the Present Issue Terms of payments
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(a) The caption Interest in Case of Delay on Despatch of Allotment Letters/Refund Orders in Case of Public Issues shall appear and shall contain the following statement: The company agrees that as far as possible allotment of securities offered to the public shall be made within 30 days of the closure of public issue. The company further agrees that it shall pay interest @ 15% per annum if the allotment letters/refund orders have not been despatched to the applicants within 30 days from the date of the closure of issue in fulfillment of underwriting obligations to meet the minimum subscription requirement, shall not be entitled for the said interest. b) Arrangements for disposal of odd lots c) Rights of the instrument holders d) How to apply-availability of forms, prospectus and mode of payment. e) Disclosures about Stock invest: (i) The disclosures regarding manner of obtaining and mode of drawing stock invests, non-utilisation of stock invests by third party, time period for utilization of stock invests by the purchasers and disposal of applications accompanied by stock invest as specified by the RBI shall be incorporated at the appropriate places in the offer document. (ii) Name of the bank through which the stock invests shall be realized, shall be given in the prospectus. (iii) The following paragraph shall be incorporated at the appropriate places in the prospects: Registrars to the Issue have been authorized by the company (through resolution of the Board passed on) (date) to sign on behalf of the company to realize the proceeds of the stock invest from the issuing bank or to affix non-allotment advice on the instrument or cancel the stock invest of the non-allottees or partially successful allottees who have enclosed more than one stock invest. Such cancelled stock invest shall be sent back by the Registrars directly to the investors. (f) Despatch of Refund Orders The following clause shall be incorporated in the prospectus: The company shall ensure despatch of refund orders of value over Rs.1, 500 and share/debenture certificates by Registered Post only. Adequate funds for the purpose shall be made available to the Registrars by the issuer company. Undertaking by the Issuer Company. Utilisation of Issue Proceeds Any special tax benefits for company and its shareholders. 4. Particulars of Issue (a) (b) (c) (d) (e) Objects Project cost Means of financing Appraisal Deployment of funds in the project
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5. Details about the Company Management and Project (a) (b) (c) (d) (e) History, main objects and present business of the company. Subsidiaries of the company. Promoters and their background. Key Managerial Personnel. Names, addresses and occupation of manager, managing director and other directors including nominee directors, whole-time directors and their directorships in other companies. (f) Cost of the project, means of financing and location of the project (g) Plant and machinery for the project, technology adopted and process of manufacture. (h) Collaboration, performance guarantee or assistance in marketing by the collaborators. (i) Infrastructure facilities for raw materials and utilities like water, electricity, etc. (j) Schedule of implementation of the project, with separate details of land acquisition, civil work, installation of plant and machinery and the progress till the date of the prospectus. (k) Expected date of trial production and commercial production. (l) Nature of the products, consumer/industrial and end users and approach to marketing and proposed marketing set up. (m) Export possibilities and export obligation. (n) Expected capacity utilization during the first 3 years from the date of commencement of production for each of the major product groups. (o) Expected year when the company would be able to earn cash profits and net profits and the expected cash profits and net profits for the next 3 years. (p) High/Low equity prices of the shares/debentures of the company for each of the last 3 years and monthly high/low prices for the last 6 months (applicable to existing listed companies). 6. Management discussion and Analysis of financial conditions and result of the operations as reflected in the financial statements. 7. Financial information of Group Companies. 8. Information about Companies Under the Same Management Covered u/s 370(1)(B) In respect of any issue made by the company and other listed companies under the same management, the following details are to be incorporated. 1. Name of the Company; 2. Year of issue; 3. Type of issue (Public/Private/Composite); 4. Amount of Issue; 5. Date of Closure of issue; 6. Date of completion of delivery of share/debenture certificates/letters of allotment; and 7. Date of completion of the project, where the object of the issue was for financing a project; 8. Rate of dividend paid;
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9. Promise vis--vis Performance; 10. The following information shall be disclosed for all issues irrespective of the issue price: a. Earnings per share, i.e. EPS pre-issue for three years (as adjusted for changes in capital); b. P/E pre-issue and comparison thereof with industry P/E where available (giving the source from which industry P/E has been taken); c. Average return on net worth in the last three years; d. Minimum return on increased net worth required to maintain preissue EPS; e. Net Asset value per share based on last balance sheet; f. Net Asset Value per share after issue and comparison thereof with the issue price; Provided that the projected earnings shall not be used as a justification for the issue price in the offer document: Provided further that the accounting ratios disclosed in the prospectus in support of basis of the issue price shall be calculated after giving effect to the consequent increase in capital on account of compulsory conversions outstanding, as well as on the assumption that the options outstanding, if any, to subscribe for additional capital will be exercised; g. An illustrative format of disclosure in respect of basis for issue price is given in Schedule XV; i) The issuer company and the lead merchant banker shall provide the accounting ratios as mentioned above to justify the basis of issue price: Provided that, the lead merchant banker shall not proceed with the issue in case the accounting ratios mentioned above, do not justify the issue price. ii) In case of book issues, the offer document shall state that the final price has been determined on the basis of the demand from the investors. 11. Outstanding Litigation Pertaining to: i) Matters likely to affect operation and finances of the company, including disputed tax liabilities; and ii) Criminal prosecution launched against the company and directors for alleged offences under the following statutes: The Indian Stamp Act, 1899 The Central Excises Act, 1944 The Imports and Export (Control) Act, 1951 The Industries (Development and Regulation) Act, 1951 The Prevention of Food Adulteration Act, 1954 The Essential Commodities Act, 1955 The Companies Act, 1956 The Wealth-tax Act, 1957 The Income-tax Act, 1961 The Customs act, 1962 The Monopolies and Restrictive Trade Practices Act, 1969 The Foreign Exchange Management Act, 1999. 12. Risk Factors and Management Perception as the same, if any, 13. Disclosure on Investor Grievances and Redressal System, 14. General Information
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a) Consent of directors, auditors, solicitors/advocates, managers to the issue, Registrar to the Issue, Bankers to the company, bankers to the issue and experts. b) Expert opinion obtained, if any. c) Change, if any, in directors and auditors during the last three years, and reasons thereof. d) Authority for the issue and details of resolution passed for the issue. e) Procedure and time of schedule for allotment and issue of certificate. f) Names and addresses of the company secretary, legal adviser, lead managers, co-managers, auditors, bankers to the company, bankers to the issue and brokers to the issue. 15. Financial Information. A report from the auditors on: a) Profits and Losses- of the company (where there is no subsidiary company) and the combined profits and losses of the subsidiaries or individual profits and losses of each subsidiary for each of the five financial years preceding the issue of prospectus (where there are subsidiaries); b) Assets and Liabilities- of the company (where there is no subsidiary company) at the last date to which the accounts are made up and the combined assets and liabilities of the subsidiaries or individually with the assets and liabilities of each subsidiary (where there are subsidiaries); and c) Rates osf the Dividends- paid by the company in respect of each class of shares for each of the five financial years preceding the issue of prospectus. If no accounts have been made up in respect of any part of the period of five years ending three months before the date of issue of prospectus, the report should contain a statement of the fact. Further, a statement of accounts of the company should be made in respect of a part of the said period up to a date not earlier than six months of the date of issue of prospectus and the assets and liabilities position as at the end of that period. There should be a certificate from the auditors that such accounts have been examined and found correct by them. The report should distinguish items of a non-recurring nature and indicate the nature of provisions or adjustments made or are yet to be made. 16. Statutory and other information a) Minimum subscription, as laid down in the SEBI guidelines. b) Expenses of the issue giving separately fees payable to advisers, registrars to the issue, managers to the issue and trustees for debenture holders. c) Underwriting commission and brokerage. d) Previous issue for cash or consideration otherwise than for cash e) Details of public or right issue during the last five years. i) Date of allotment and refund; ii) Date of listing on the stock exchange; and iii) Amount of premium or discount, if applicable. f) Details of premium received in respect of any issue of shares made in the two years preceding the date of issue of prospectus or to be
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made stating the proposed date of issue, the reasons for differentiation of premium for different categories, if applicable and the disposal of premium received or to be received. g) Commission or brokerage paid on previous issue. h) Debentures and redeemable preference shares and other instruments outstanding on the date of prospectus and the terms of their issue. i) Option to subscribe. The details of options to subscribe for securities to be dealt with in a depository. j) Particulars of property purchased or proposed to be purchased from vendors to be paid for wholly or partly out of the proceeds of the issue and the interest of the promoters or directors in any transaction relating to the property within the last two years. k) Details of directors, proposed directors, whole-time directors, their remuneration, appointment and remuneration of the managing director(s). l) Interests of directors, their borrowing powers and qualification shares. m) Any amount or benefit paid or given within the two preceding years or intended to be paid or given to any promoter or officers and consideration for the payment or giving of the benefit. n) The dates of, parties to, and general nature of i) every contract of appointment or remuneration of a managing director or manager; and ii) every other material contract, not being a contract entered into in the ordinary course of business of the company or entered into more than two years prior to the date of prospectus: Reasonable time and place for inspection of the contract should be provided for. o) Full particulars of the nature and extent of interest of every director or promoter. i) In the promotion of the company; or in any property acquired by the company within two years of the date of the prospectus or proposed to be acquired by it. p) Rights of members regarding voting, dividend, lien on shares, and modification of rights and forfeiture of shares/debentures. q) Restriction on transfer and transmission of shares/debentures and on consolidation /splitting. r) Revaluation of assets, if any, during the last 5 years. s) Material Contracts and Inspection of Documents t) Particulars of default in meeting statutory dues, institutional dues, dues to holders of instruments like debentures, fixed deposits and arrears of cumulative preference shares, pertaining to the company and/or other companies promoted by the same promoters, which are listed on stock exchanges. u) Any material development after the date of the last balance sheet and its impact on the performance and prospects of the company. Misleading prospectus Meaning of Misleading Prospectus (Section 65) The Prospectus may be described as misleading prospectus if it contains untrue statement. The prospectus is said to have contained untrue statement in the following circumstances:
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a) Where it contains a statement which is misleading in the form and context in which it is included and b) Where it omits any matter which is calculated to mislead. Thus, the term untrue statement has been used in a broader sense. It covers not only false statement, but also concealment of material statements. Rule of Golden Legacy Justice Kindersley, V.C. in New Brunswick and Canada Rly. and Land Co. v. Muggeridge [(1860), 3 Lt. 651: 30 LJ Ch.242] observed: Those who issue a prospectus hold out to the public that great advantages will accrue to persons who will take shares. Public is invited to take shares on the faith of the representation contained in the prospectus. Therefore, they are bound to state everything honestly and faithfully. They must not only abstain from stating something as a fact when it is not actually so but also must not omit a fact the existence of which might in any degree affect the nature or quality of the privileges and advantages which the prospectus holds out as an inducement to take shares. The above stated rule is popularly knows as Rule of Golden Legacy. Remedies against the company a) Rescission of the Contract Where a prospectus contains misstatements (whether made innocently or fraudulently), the contract to subscribe for shares become voidable at the option of the aggrieved subscriber. In other words, subscriber to the shares can file a suit against the company to rescind the contract under the general law of contract. The right of rescission of contract can be exercised subject to the following conditions: i) The prospectus must have been issued by the company or by someone authorized by the company in this behalf. ii) There must be misrepresentation or omission of a fact. In other words, a mere opinion, a statement of expression or intention does not amount to misrepresentation. iii) The misrepresentation must of fact and not of law. iv) The misrepresentation or omission of a fact must be misleading. In case of Arnison v. Smith,(1889) 40 Ch. D.569, A statement in the prospectus did not contain any untrue statement. One of the statements disclosed the rates of dividends paid for a number of years. This was a factual statement, which was true. But the dividends had not been paid out of trading profits but out of realised capital profits. This fact was not disclosed in the prospectus. The prospectus was held to be misleading not because of what is stated but because what it concealed or omitted. Further, if a statement was true when it was made but subsequently became untrue when shares were allotted, the contract to subscribe for shares can be rescinded. [Re Scottish Petroleum Co., (1823) 23 Ch. D.413]
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v) The misrepresentation must be material to the contract of taking shares. A fact can be considered as material if it is likely to influence the judgement of a prospective investor in deciding whether he should purchase shares in the company or refrain from doing so. In the various, judicial decisions, the misrepresentation were held to be material facts. a) A statement that two leading businessmen of repute have agreed to become directors of the company when they had only expressed their willingness to help the company. [Re Metropolitan Coal Consumers Association, (1892) 3 Ch. 2] b) A statement that the proceeds of the issue of debentures were to be utilized for improving and developing the business whereas the real object of issuing debentures was to pay-off past liabilities. [Edington v. Fitzmaurice, (1885) 29 Ch. D.459] c) A statement that directors and their friends have subscribed a large portion of the capital of the company and that they now offer the remaining shares to the public whereas the fact was that they had only subscribed ten shares each. [Handerson v. Lacon, (1867) 5 Eq. 249] vi) The aggrieved party must have relied upon the prospectus while applying for shares. A purchaser of shares in the open market has no remedy against the company or any other persons even if he might bought the shares on the faith of misrepresentation in the prospectus. [Peek v. Gurney, (1870 L.R. 6 H.L. 377)] vii) The aggrieved party must exercise the right to rescind the contract within a reasonable time of becoming aware of a mis-statement in the prospectus and before the company goes into liquidation. [Shiromani Sugar Mills Ltd. v. Debi Prasad, AIR (1950) All 508] viii) The aggrieved party must exercise the right to rescind the contract before he affirms his contract for purchase of shares. In the following cases, it has been held that the subscriber has affirmed the contract: a) Were he has received divided or paid cash [Scholey v. Central Railway, (1868) L.R. 9 Eq. 266], b) where he attends and votes at general meetings [Shrpley v. Louth Etc. Co. (1876) 2 Ch. D. 663], c) where he executes a transfer of his shares [Crowleys case (1869) L.R. 4 Ch. App. 332]. It may be noted that a transfer of part of shares before discovery of misrepresentation does not affect his right as to the rest. [Re Mount Morgan Etc. Ltd. (1887) 56 L.T. 622] b. Damages for Fraud (Deceit) The subscriber can recover damages for any loss which he may have suffered if he was induced to take shares based on a fraudulent misrepresentation of material facts. Lord Herschall in Derry v. Peek, (1889) 14 A.C. 337, said: To support an action for deceit, fraud must be proved and nothing less than fraud will do. Fraud is proved where it
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is shows that a false statement has been made (a) knowingly, or (b) without relief in its truth, or (c) recklessly, carelessly whether it is false or true. The right to claim damages may be exercised subject to the fulfillment of the following conditions: i. There must be fraudulent misrepresentation, ii. The fraudulent misrepresentation must relate to facts which are material to the contract of purchasing shares, iii. The aggrieved party must have actually relied on the misstatements, iv. The aggrieved party must have taken shares directly from the company, and v. The aggrieved party must have suffered some loss. It may be noted that the right to claim damages may be exercised against the company after rescinding the contract of allotment and against the persons who authorized the issue of prospectus without rescinding the contract of allotment. The House of Lords in Houldsworth v. City Glargow Bank, (1990) 5 A.C. 317, held that if a shareholder wants to sue the company for damages, he must first rescind the contract. He can not sue the company for damages while he remains a shareholder. Remedies against directors and promoters (a) Damages for Misrepresentation Under Section 62 (1) The following persons are liable to compensate all those who subscribe for shares on the faith of the prospectus for any loss sustained by them by reason of any untrue and misleading statement included in the prospectus. i) Every person who is director of the company at the time of the issue of the prospectus. ii) Every person who has authorised himself to be named and is named in the prospectus as a director or as one having agreed to become a director, either immediately, or after an interval of time. iii) Every promoter of the company. iv) Every perso n who has aut ho rised t he issue o f t he prospectus. Notes: (a) The action for damages must be taken within 3 years from the date of the allotment of the shares. (b) A shareholder, who bought shares from existing shareholders or from the share market, cannot bring an action for deceit against directors. [Peek v. Gurney] (c) The subscribers may institute a suit for damages against those responsible for the issue of the prospectus, inspite of the fact that the contract to purchase shares has been repudiated. This is an action for deceit under the general law. [Derry v. Peek, (1889) 14 A.C.337] (d) The action for damages can be taken even if the remedy by way of rescission (as against the company) has been last through negligence or even if the company goes into liquation.
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Defences available to Directors etc. (Section 62(2)] No person shall be liable under this section, if he proves; i) ii) iii) that, if he is having consent to become a director, had withdrawn his consent to become director before the issue of prospectus and that it was issued without his authority; or that the prospectus was issued without his knowledge or consent and that on becoming aware of its issue, he immediately gave reasonable public notice to that effect; or that after the issue of the prospectus and before, allotment, he, on becoming aware of any untrue statement in it, had withdrawn his consent to the prospectus and gave reasonable public notice of the withdrawal and his reasons for doing so; or that he had reasonable ground to believe and until allotment did believe that the statement was true. This statement pertains to every untrue statement not purporting to be made on the authority of expert or of a public official document or statement or that the statement was a correct and fair representation of the statement made by an expert and he had reasonable ground to believe and until issue of prospectus did believe that the person making the statement was competent to make it and that the expert had given his consent and had not withdrawn that consent before delivery of a copy of the prospectus for registration or to the defendants knowledge, before allotment; or that if the statement is a copy of or extract from an official document or his made by an official person, it was a correct and fair copy of the document or a fair representation of the statement.
iv)
v)
vi)
Remedies against expert (section 62(3)] The form expert includes an engineer, a valuer, an accountant and any other person whose profession gives authority to a statement made by him (section 59(2)]. An expert is liable to compensate only in respect of his own untrue statement, wrong report or valuation made by him and included in the prospectus. a) Defences Available to an Expert An expert shall not be liable if he provesi) having given his consent, he withdrew it in writing before delivery of a copy of the prospectus for registration with the Registrar of Companies; or ii) after delivery of prospectus for registration with the Registrar of Companies but before allotment, he on becoming aware of the untrue statement, withdrew his consent in writing, and gave reasonable public notice of the withdrawal and his reasons therefore; or iii) he was competent to make the statement, and believed on reasonable grounds that it was true.
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Measure of Damages- The damages is the loss suffered by reason of the false statement, that is to say, the difference between the value which the shares would have had if the company had processed the advantages stated in the prospectus (but not exceeding the price paid) and the true value of the shares at the time of allotment in the circumstances which in fact existed. [McConnell v. Wright, (1903) 1 Ch. 546] Right of Indemnity- Every such director or expert who has escaped liability on the above grounds is entitled to be indemnified by other directors or experts who continue to be liable against all damages, costs and expenses which he may incur in defending himself against any legal proceedings brought against him. (Section 62(4)] Right of Contribution- If any subscriber realizes any damages from any director or officer of the company for untrue statement in the prospectus, the directors and officers who authorized the issue of untrue prospectus shall contribute and pay their share of damages to the director who has made the payment. [Gerson v. Simpson, (1903) 2 K.B. 197] b) Damages for Omission u/s 56 In case of any omission of required matter in the prospectus, the subscriber can sue the persons responsible for the issue of prospectus if he can prove a) that he would not have purchased shares if there had been no such omissions, and b) that he has actually suffered a loss. Notes: i) Omission does not entitle the subscriber to rescind the contract unless it amounts to fraud or misrepresentation. [Shiromani Sugar Mills v.Debi Prasad, AIR (1950) All. 508] ii) Subscriber can sue even if omission does not make the prospectus misleading. 1) Defences Available (Section 56(4)] A director or any other person sued under this section shall not be liable, if a) he proves that he had no knowledge of any matter not disclosed; or b) he proves that the non-compliance or contravention arose from an honest mistake of fact; or c) in the opinion of the court, the matter not disclosed was immaterial; or d) that the non-compliance or contravention ought to be excused with regard to all the circumstances of the case. Criminal Liability for Misstatement (Section 63) Every person who had authorized the issue of prospectus containing an untrue statement shall be punishable with imprisonment for a term up to 2 years or with fine up to Rs.5,000 or with both unless he proves either
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a) that the statement was immaterial; or b) that he had reasonable ground to believe and did up to the time issue of prospectus that the statement was true. Penalty for fraudulently inducing persons to invest money (section 68) Any person who, by making (either knowingly or recklessly) any false, deceptive or misleading statement, promise or forecast or by any dishonest concealment of material facts, induces or attempts to induce another person to enter into, or to offer to enter into a) any agreement for, the acquisition, disposal, subscribing for, or underwriting shares or debentures, or b) any agreement for the purpose of securing any profit to any of the parties from the yield of shares or debentures, or from fluctuations in the value of shares or debentures; shall be punishable with imprisonment for a term up to 5 years, or with fine up to Rs.1,00,000 or with both. Personation for acquisition etc., of shares. (Section 68a (1) Any person who a) makes an application to a company for acquiring, or subscribing for, any shares therein, in a fictitious name or b) otherwise induces a company to allot, or register any transfer of, shares therein to him, or any other person in a fictitious name, shall be punishable with imprisonment for a term up to 5 years. Disclosure in Prospectus (Section 68A (2)] The provisions of Section 68A (1) must be prominently reproduced in every prospectus issued by the company and in every form of application for shares which is issued by the company to any person. Issue of securities only in demat form (Section 68B] Initial Public officer of Securities of at least Rs.10 crore must be only in Dematerialized form, by complying with the requisite provisions of the Depositories Act, 1996 and regulations made there under. According to SEBI Guidelines a company can make an issue of securities to the public or on right basis only in demat form, while this new section implies that only with regard to initial offer it should be in demat form, whereas for any subsequent issue it could be in physical form. Statement in lieu of prospectus (section 70) When required- When the public company having share capital decides to raise the capital privately (say from relatives and friends) without inviting offers from the public. It is required to issue a statement in lieu of prospectus.
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Contents- The statement in lieu of prospectus shall contain the particulars and reports as set out in Schedule III to the Companies Act. Signature-The statement to be delivered to the Registrar for registration must be signed by every person who is named in the statement as director or proposed director or his agent authorized in writing. Delivery- The statement must be delivered to the Registrar for registration at least 3 days before the allotment of the shares or debentures. Penalty for Default- The Company and every director of the company, who willfully authorizes or permits contravention, shall be punishable with fine up to Rs.10, 000. Liability for Misstatement- The liability for any misstatement is a Statement in lieu of prospectus is the same as in case of prospectus. Is a Private Company Required to Issue Prospectus or Statement in Lieu of Prospectus? A private company is neither required to issue a prospectus nor a statement in lieu of prospectus since it cannot invite public to subscribe for its shares or debentures as per restrictions of Section 3(1)(iii). Public deposits Meaning of Public In general the term Public includes a section of the public also. But section 58A (1) makes a distinction between the public and the members of the company. Present and ex-employees of the company fall in the category of public. Meaning of Deposit Deposit means any deposit of money including any amount borrowed by a company but would not include: a) Amount received from the Central Government or State Government or Local Authority or a Foreign Government or any foreign citizen, authority or a foreign person. b) A loan received from any banking company. c) A loan received from IFCI, UTI, IDBI, LIC or ICICI or any other financial institutions. d) Amount received by a company from any other company provided the borrower company has not entered the field of commercial production and has not accepted any deposits from the public. e) Any amount of security deposit received from an employee of the company. f) Amount received as security or as an advance from any purchasing agent, selling agent during the course of business of the company.
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g) Amount received as subscriptions to any shares, bonds or debentures pending allotment including the amount received as calls in advance on shares. h) Amount received in trust or any amount in transit. i) Amount received by a public company from its directors or by a private company or a deemed public company from its shareholders or directors. j) Amount raised by issue of bonds or secured debentures. k) Amount brought by promoters as unsecured loans subject to certain conditions. Power of Central Government to Frame Rules [Section 58(1)]-The Central Government is empowered to prescribe in consultation with Reserve Bank of India the limit up to which, the manner in which and the conditions subject to which the deposits may be invited from the public or from its members. Conditions subject to which Deposits may be Invited [Section 58A (2)] No company shall itself or through any other person invite any deposit unless: a) Such deposit is invited as per the rules of section 58(1) b) An advertisement including a statement showing the financial position of the company has been issued by the company in such form and manner as may be prescribed. c) The company is not in default in the repayment of any deposit or part thereof and any interest thereupon in accordance with the terms and conditions of such deposit. Obligation to Repay Unrenewed Deposits [Section 58A (3)] Every deposit accepted by a company after Sept, 1, 1989, must be repaid in accordance with terms and conditions of deposit unless renewed as per rules. Obligation to Repay Deposits Accepted in Violation of Rules [Section 58A (4)] Where any deposit is accepted in contravention of the rules it must be refunded within 30 days from the date of acceptance of such deposit or within such further extended time not exceeding 30 days as the Central Government may allow on sufficient cause shown by the company (Section 58A(4)]. Penalty for Default in Repayment of Deposits Accepted in Violation of Rules (Section 58A (5)] If the company fails to make repayment of deposit within the time allowed the company shall be punishable with fine which shall be at least 200% of the amount of deposit not repaid. Every officer in default shall be punishable with imprisonment up to 5 years and fine.
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If fine realized then the court shall pay an amount equal to the amount of deposit not repaid to the depositor and with that the companys liability to that extent shall stand discharged. Penalty for Contravention Relating to the Acceptance of Deposits [Section 58A (6) 1. The company shall be punishable with find which shall be at least an amount equal to the amount of the deposit so accepted. 2. Its every officer in default shall be punishable with imprisonment for term up to 5 years and fine. Penalty for Contravention Relating to the Invitation of any Deposit [Section 58A (6)] 1. The company shall be punishable with fine up to 1, 00,000 but five shall be at least Rs.5, 000. 2. Its every officer in default shall be punishable with imprisonment for a term up to 5 years and fine. Companies to which Provisions of Section 58A do not Apply [Section 58A (7)] 1. A banking company 2. Such other company which the Central Government may after consultation with Reserve Bank of India specify in this behalf. The Central Government has exempted the companies which are small scale industrial units and fulfill the following conditions: a) The paid up capital of the company does not exceed Rs.25 lakh. b) Deposits are not accepted from more than 100 persons. c) the deposits do not exceed Rs. 20 lakh or the amount of its paid up capital, which ever is less, and d) there is no invitation to public for deposits (vide Notification GSR No.73 1E, Dt. 12.2.96). i) a Small Scale Industrial Unit means any industrial undertaking registered with the Directorate of Industries or Small Scale Industries, as the case may be, of the State Government and in respect of which the investment in plant and machinery is not in excess of 3 crores of rupees in value; ii) Deposit has the same meaning as in Clause (b) of Rule 2 of the Companies (Acceptance of Deposits) Rules, 1975. Companies to which Provisions except Relating to Advertisement of Section 58A do not Apply (Section 58A (8)] The Central Government has exempted the class of companies which satisfy the eligibility criteria laid down by the Reserve Bank of India in the Non-Banking Companies (Acceptance of Deposits through commercial paper) Directives, 1989 subject to the following conditions: i) The companies shall comply with the terms and conditions stipulated from time to time by the RBI. ii) The companies shall, in their annual accounts disclose the maximum
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amount raised at any time during a financial year and the amount outstanding as at the end of financial year [Notification GSR 1075(E), dated 29.12.1989]. Power of Company Law Tribunal to Order Companies to Repay deposits (Section 58A (9)]- In case a company fails to repay any deposit as per the terms and conditions of deposit, the Company Law Tribunal is empowered to order companies to repay deposits within such time and subject to such conditions as may be specified in the order. This power may be exercised suo-moto (of its own) or on the application of a single deposit holder. But before making such an order the Company Law Tribunal may give the company a reasonable opportunity of being heard on the matter (Section 58A(9)]. Penalty [Section 58A (10)] Whosoever fails to comply with the orders of the Company Law Tribunal shall be punishable with imprisonment up to 3 years and fine of at least Rs.500 for every day during which the default continues. Right of Aggrieved Depositor The aggrieved depositors, whose deposits had matured after and who have not been repaid, may make an application (in triplicate) to Company Law Board Bench (located at Delhi, Calcutta, Bombay and Madras depending upon the registered office of the company) in the prescribed Form No.11, along with an application fee of Rs.50 by bank draft in favour of the Pay and Accounts Officer, Department of Company Affairs. The application can either be filed with the concerned Bench Officer personally or sent by post. It may be clarified that, in the following circumstances, application under Section 58A (9) of the Act will not lie: i) Deposit made for booking/purchase of scooter, car, etc. is not a deposit for purposes of Section 58A of the Act. ii) Deposits accepted by financial companies like hire purchase finance company, a housing finance company, an investment company, a loan/mutual benefit financial company, and equipment leasing company, a chit fund company or a company, which receives deposits under any scheme or arrangement by way of contribution/ subscriptions or by sale of units/certificates. iii) Deposits accepted by a sick industrial company covered by the Sick Industrial Companies (Special Provisions) Act, 1985, in respect of which the Board of Industrial and Financial Reconstruction (BIFR) has specifically, by order, suspended the operation of any contract, agreement, settlement, etc., under Section 22(3) of the said Act. iv) Deposits accepted by relief undertakings which are notified as such under the various State Laws. Proceedings under Section 58A (9) of the Companies Act, 1956 shall remain stayed during the notified period.
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In addition to the relief available under the Companies Act, 1956, depositors can also take action against the defaulting companies under the normal civil law of the country. Nomination [Section 58A (11)] A depositor may make a nomination and the provisions of Section 109A and B shall apply to such nomination. Small depositors (section 58aa] Meaning of Small Depositor A small depositor means a depositor who has deposited in a financial year a sum not exceeding Rs.25,000 in a company and includes his successors, nominees and legal representatives. It does not include those depositors who renew their deposits and those depositors whose repayment is not made to death or has been stayed by a competent court. Duty of Defaulting Company to Intimate CLT Where a company fails to repay the deposit as interest thereon to any small depositor, it must give intimation as monthly basis to the Company Law Tribunal within 60 days of the date of default stating the names and addresses of each small depositor(s) the principal sum of deposits due to them and interest thereon. Power of CLT to Make an Order The company Law Tribunal on receipt of such intimation shall pass an appropriate order within 30 days from the date of receipt of intimation from the company after giving the small depositor an opportunity of being heard. Restrictions on the Defaulting Company 1. It must be accept further deposits from small depositors unless it repays all matured small deposits along with interest due thereon. 2. It must state in all its future advertisement and applications inviting deposits the following details: total number of small depositors is the amount due to there in respect of which the default was committed. 3. The fact of such waiver must be mentioned in every future advertisement and application from inviting deposits where the interest accrued as small deposits has been waived. 4. The application form inviting deposits must contain a statement that the applicant had been apprised of every past default, waiver of interest, etc. 5. If the company subsequent to acceptance of small deposits avails any working capital from any bank, it must be first utilized for repaying the principal and interest due to small depositors before applying the funds for any other purpose. Penalty for Default The penalty for failure to comply the provisions of this section or order of CLT is subject to a find of Rs.500 per day and imprisonment up to 3 years. Directors are also liable to be proceeded against:
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Non-refund of deposits to be cognizable. (section 58aaa] 1. Any offence relating to acceptance of deposits under Section 58A or Section 58AA shall an offence cognizable under the Criminal Procedure Code. 2. No court shall take cognizance of any offence under this provision except on a complaint made by the Central Government or any officer authorised by it in this behalf. Provisions Relating to Prospectus to Apply to Advertisement (Section 58B) The provisions of this Act relating to a prospectus shall, so far as may be, apply to an advertisement referred to in Section 58A. But having regard to the words so far as may be as used in Section 58B, wherever in respect of certain matters specific provisions have been made in Section 58A or the Companies (Acceptance of Deposits) Rules, 1975, the corresponding provisions in the Act relating to prospectus would not apply to this advertisement. For example, Section 56(1) requires a prospectus to contain information on matters specified in Schedule II. This will not be applicable on an advertisement inviting deposits because of Rule 4 of the Companies (Acceptance of Deposit) Rules, 1975. The companies (acceptance of deposits) rules, 1975 A summary of these rules is given below: 1. Minimum Term of Deposit A company can accept or renew deposits for a minimum period of 12 months (6 months in case of deposits for meeting short term requirements of funds). 2. Maximum Term of Deposit A company can accept or renew deposits for a maximum period of 5 years. 3. Maximum Limit of Deposits
Deposits Maximum Limit
a) In case of deposits received from general public
25% of the paid -up capital and reserves (10% in case of deposits for less than 12 months) (35% in case of Govt.Company)
b) In case of deposits received against unsecured debentures or from shareholders
10% of the paid up capital and free reserves
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4. Meaning of Free Reserves It includes the amount in the securities premium account capital and debenture redemption reserves and other reserves appearing in the balance sheet and created by way of appropriation from the profits of the company. But the term free reserves would not include any reserve created: i) For repayment of any future liability or for depreciation on assets or for bad debts. ii) By revaluation of assets. For calculating the total paid up capital and free reserves, the following shall be reduced. a. the debit balance of profit and loss account. b. the balance of deferred revenue expenditure. c. the balance of other intangible assets. 5. Maximum Rate of Interest A company can accept or renew deposits at a rate of interest no exceeding 14% p.a. at rests not shorter than monthly rents. 6. Maximum Rate of Brokerage to any Broker 7. Advertisement a. In Two Newspapers: Advertisement inviting deposits from public shall appear in leading English Newspaper and in one vernacular newspaper circulating in the state where the registered office of the company is situated. b. Under Boards Authority: The advertisement must be issued on the authority and in the name of the board of directors of the company. c. Contents: It must contain the conditions subject to which deposits shall be accepted, the date on which the Board approved the text of advertisement and the prescribed information. d. Hold Good Period: The advertisement for acceptance of deposits shall hold good for 6 months from the date of the closure of financial year in which it is issued or until the date of the holding of the annual general meeting where the balance sheet is presented or where the annual general meeting is not held for any year, the latest day on which the meeting should have been held as per the Act, whichever is earlier. After the expiry of the above period the companies are required to issue a fresh advertisement for inviting further deposits. e) Filing of copy of ROC: No advertisement for inviting deposits can be issued unless a copy of the advertisement duly approved and signed by a majority of the directors of the company has been filed with the Registrar. In case a company intends accepting deposits without an advertisement, it must filed with the Registrar a copy of the statement in lieu of advertisement stating the particulars required in the advertisement and duly approved and signed by the majority of the directors of the board.
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8. Application Form for Deposit A company can invite or renew deposits only on the form supplied by the company. The form shall contain all prescribed particulars in relation to accepting deposits especially in relation to financial position, composition of management of the company, etc. so as to enable the prospective investors to assess the risk before making deposits. It must also include declaration by the applicant that the amount is not being deposited out of funds acquired by him by borrowing or accepting deposits form any other person. 9. Issue of Receipts Every company must furnish to the depositor or his agent a receipt specifying the date of deposit, name and address of depositor, amount of deposit, rate of interest payable and the date of maturity of deposit within 8 weeks. The receipt must be signed by a duly authorized officer of the company. 10. Register of Deposits The company must maintain a register of deposits at its registered office stating details about name and address of depositors, date and amount of each deposit, period of deposits, rate of interest, dates when interest will be paid and the date when each deposit shall become repayable. Such register must be preserved by the company for at least 8 calendar years from the financial year in which the latest entry was made in the register. 11. Maintenance of Liquid Assets Every company before the 30th day of April of each year must deposit or invest, as the case may be at least 15% of the amount of its deposits maturing during the year commencing from 1st day of April and ending on 31st day of March of the following year in any or more of the securities as prescribed. 12. Filing of Deposits with ROC and RBI Every company accepting deposits must on or before 30th June of every year file with the Registrar a return duly certified by the auditor of the company, in the prescribed form furnishing information as on 31st day of March of that year. A copy of such return is also to be simultaneously filed with the Reserve Bank of India. 13. Penalty If a company or any other person contravenes any of these rules for which no punishment is provided in the Act, the company and its every officer in default or such other person shall be punishable with fine up to Rs.5,000 and in case of continuing default, with a further fine up to Rs.500 per day.
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2.3.5. Powers, duties and liabilities of Directors Who is a director of the company? A company in the eyes of the law is an artificial person. It has no physical existence. It has neither soul nor a body of its own. As such, it cannot act in its own person. The company itself cannot act in its own person, for it has no person; it can only act through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent. The directors are the brain of a company. They occupy a pivotal position in the structure of the company. They are in fact the mainspring of the company. Speaking about the importance of directors, Neville J., observed in Bath c., Standard Land Co., (1910) 2 Ch. 408 that the Board of directors are the brain and the only brain of the company which is the body, and the company can and does act only through them. It is only when the brain functions that the corporation is said to function. Definition [Sec. 2 (13)] Director includes any person occupying the position of director, by whatever name called. The important factor to determine whether a person is or not a director is to refer to the nature of the office and its duties. It does not matter by what name he is called. If he performs the functions of a director, he would be termed a director in the eyes of the law even though he may be named differently. A director may, therefore, be defined as a person having control over the direction, conduct, management superintendence of the affairs of a company. Any person in accordance with whose directions or instructions, the Board of the company. But such a person shall not be deemed to be a director if the Board acts on the advice given by him in a professional capacity. Only individuals can be directors (Sec. 253), No body corporate, association or firm can be appointed director of a company. Only an individual can be so appointed. 2.3.5.1 Number of directors Every public company (other than a deemed public company) shall have be at least 3 directors and every other company (e.g., a private company, a deemed public company) at least 2 directors. [Sec. 252(1)]. However a public company having(a) a paid-up capital of Rs. 5 crore or more; (b) one thousand or more small shareholders; shall have at least one director elected by such small shareholders in the manner as may be prescribed. Small shareholder means a shareholder holding shares of nominal value of Rs. 20,000 or less in a public company to which Sec. 252(1) applies [Provison to Sec. 252(1) as introduced by the Companies (Amendment) Act, 2000].
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Increase or reduction in number of directors (Sec. 258). Subject to the statutory minimum limit, the articles of a company may prescribe the maximum and minimum number of directors for its Board of directors. The number so fixed may be increased or reduced within the limits prescribed by the Articles by an ordinary resolution of the company in genera meeting, if the number falls below the minimum, prima facie the Board cannot act. Sanction by the Central Government (Sec. 259). Any increase in number of directors beyond the maximum permitted by the Articles shall be approved by the Central Government. But where the increase in number does not make the total number of directors more than 12, no approval of the Central Government is needed. 2.3.5.2 .Appointment of directors 1. First directors (Sec. 254 and Clause 64 of Table A). (a) The Articles of a company usually name the first directors by their respective names or prescribe the method of appointing them. (b) If the first directors are not named in the Articles, the number of directors and the names of the directors shall be determined in writing by the subscribers of the Memorandum or a majority of them (Clause 64 of Table A). (c) If the first directors are not appointed in the above manner, the subscribers of the Memorandum who are individuals become directors of the company. They shall hold office until directors are duly appointed in the first annual general meeting (Sec. 254). 2. Appointment of directors by the company (Secs. 255 to 257, 263 and 264). Directors must be appointed by shareholders in general meeting. In the case of a public company or a private company which is a subsidiary of a public company, at least 2/3rd of the total number of directors shall be liable to retire by rotation. Such directors are called rotational directors and shall be appointed by the shareholders in general meeting. Ascertainment of directors retiring by rotation and filling of vacancies (Sec. 256). (1) At the annual general meeting of a public company or a private company which is a subsidiary of a public company 1/3rd (or the number nearest to 1/3rd of the rotational directors shall retire from office. (2) The directors to retire by rotation at every annual general meeting shall be those who have been longest in the office since their last appointment. (3) At the annual general meeting at which a director retires by rotation, the company may fill up the vacancy (thus created) by appointing the retiring director or some other person. (4) If the place of the retiring director is not filled up, the meeting may resolve not to fill the vacancy. If there is no such resolution, the meeting shall stand adjourned till the same day in the next week. If at the adjourned meeting also, the place of retiring director is not filled up, nor is there a resolution not to till the vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned meeting.
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3. Appointment of directors by directors (Sec. 260, 262 and 313). The directors of a company may appoint directors(1) As additional directors (Sec. 260). Any additional directors appointed by the directors shall hold office only up to the date of the next annual genera meeting of the company. The number of directors and additional directors must not exceed the maximum strength fixed for the Board by the Articles [Patrakola Tea Co., Re, A.I.R. (1967) Ca. 406]. If the annual general meeting of a company is not held or cannot be held, the additional director shall vacate his office on the day on which the annual general meeting should have been held. If an additional director has been appointed as managing director also, the moment he ceases to be an additional director, and he will cease to be the managing director. (2) In a casual vacancy (Sec. 262). In the case of a public company, or a private company which is a subsidiary of a public company, if the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may be filled by the Board of directors at a meeting of the Board. This power of the Board is subject to any regulations in the Articles of the company. By casual vacancy is meant any vacancy which occurs by reason of death, resignation, disqualification, or failure of an elected director to accept the office for any reason other than retirement by rotation. A vacancy caused by the retirement of a director by rotation is not a casual vacancy; such a vacancy has to be filled by the annual general meeting. (3) As alternate director (Sec. 313). An alternate director can be appointed by the Board if it is so authorized by (i) the Articles of the company, or (ii) a resolution passed by the company in the general meeting. He shall act for a director, called the original director during his absence for a period of at least 3 months from the State in which Board meetings are ordinarily held. 4. Appointment of directors by third parties. The Articles under certain circumstances give power to the debenture-holders or other creditors, e.g., a banking company or financial corporation, who have advanced loans to the company to appoint their nominees to the Board. The number of directors so appointed shall not exceed 1/3rd of the total number of directors, and they are not liable to retire by rotation. 5. Appointment by proportional representation (Se. 265). The Articles of a company may provide for the appointment of not less than 2/3rd of the total number of directors of a public company or of a private company which is a subsidiary of a public company according to the principle of proportional representation. The proportional representation may be by a single transferable vote or by a system of cumulative voting or otherwise. The appointment shall be made once in 3 years and interim casual vacancies shall be filled in the manner as provided in the Articles.
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6. Appointment of directors by the Central Government (Sec. 408). Sec. 408 empowers the Central Government to appoint such number of directors on the Board of a company as the Tribunal may, by order in writing, specify as necessary to effectively safeguard the interests of the company or its shareholders or the public interest. The appointment will be for a period not exceeding 3 years on any one occasion. The purpose of the appointment is to prevent the affairs of the company from being conducted either in the manner(a) Which is oppressive to any members of the company; or (b) Which is prejudicial to the interests of the company or to public interest? The Tribunal may pass the above order on a reference made to it by the Central Government or on the application(i) of not less than 100 members of the company, or (ii) of members of the company holding not less than 1/10th of the total voting power therein. Any director appointed by the Central Government shall not be required to hold any qualification shares not shall his period of office be liable to termination by retirement of directors by rotation. Any such director may be removed by the Central Government from his office and another person may be appointed in his place. Position of directors It is very difficult to pinpoint the exact legal position of the directors of a company. They have been described by various names, sometimes as agents, sometimes as trustees, and sometimes as managing partners of the company. But such expressions are not used as exhaustive of the powers and responsibilities of such persons but only as indicating useful points of view from which they may, for the moment and for the particular purpose, be considered. We may now consider the position of the directors from all these points of view. Directors as agents- A company, as an artificial person, acts through directors who are elected representatives of the shareholders. They are, in the eyes of the law, agents of the company for which they act, and the general principles of the law of principal and agent regulate in most respects the relationship between the company and its directors. Directors as employees. Although the directors as a company are its agents, they are not employees or servants of the company for being entitled to privileges and benefits which are granted under the Companies Act to the employees. But there is nothing to prevent a director from being a servant of the company under a special contract of service which he may enter into with the company. The Companies Act itself indicates many situations where a director may be in the employment of a company.
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Directors as officers. For certain matters under the Companies Act, the directors are treated as officers of the company (Sec. 2 (30)]. As such they are liable to certain penalties if the provisions of the Companies Act are not strictly complied with. Directors as trustees. Directors are treated as trustees(1) of the companys money and property; and (2) of the powers entrusted to them. (1) Directors are trustees of the companys money and property in the sense that they must account for all the companys money and property over which they exercise control. They have also to refund to the company any of its money or property which they have improperly paid away or transferred. Directors are, however, not trustees in the real sense of the word because they are not vested with the ownership of the companys property. It is only as regards some of their obligations to the company and certain powers that they are regarded as trustees of the company. (2) Directors are trustees of the powers entrusted to them in the sense that they must exercise their powers honestly and in the interest of the company and the shareholders and not in their own interest. Alexander v. Automatic Telephone Co., (1900) 2 Ch. 56. The directors of a company paid up nothing on their own shares. They, however, made all the other shareholders pay a certain amount on each share. They did not tell the other shareholders of the difference. Held, this was a breach of trust, and the directors were bound to pay to the company what the others had paid on each of their shares. Piercy v. S. Mills & Co. Ltd., (1920) 1 Ch. 77. The directors of a company had the power to issue the unissued shares of the company. The company was in no need of further capital but the directors made a fresh issue a themselves and their supporters with a view to maintaining control of the company. Held, the allotment was invalid and void. Trustees for the company. Directors are trustees for the company and not for third persons who have made contracts with the company [City Equitable Fire Ins. Co. Ltd., Re (1925) Ch. 407] or for the individual shareholders. The leading case on the point is: Percival v. Wright, (1902) 2 Ch. 421. The directors of a company bought shares from a shareholder, while they were negotiating for the sale of the company to another at a very high price and they did not disclose this fact to the shareholder. The shareholder sued to have the sale set aside. Held, the sale was binding, as the directors were under no obligation to disclose the negotiations to the shareholders. Quasi-trustees. Directors are really only quasi-trustees because(1) they are not vested with ownership of the companys property; (2) their functions are not the same as those of trustees; (3) their duties of care are not as onerous as those of trustees.
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To sum up : Directors have sometimes been called as trustees or commercial trustees, and sometimes they have been called managing partners; it does not matter much what you call them so long as you understand what their real position is, which is that they are really commercial men managing a trading concern for the benefit of themselves and of all the shareholders in its. They stand in a fiduciary position towards the company in respect of their powers and capital under their control. 2.3.5.3. Restrictions on the appointment of directors (Sec. 266) A person shall not be capable of being appointed director of a company by the Articles and shall also not be named as a director or proposed director in the prospectus unless before the registration of the Articles, or the publication of the prospectus or the filing of the statement in lieu of prospectus, as the case may be, he or his agent authorized in writing, has(1) signed and filed with Registrar a consent in writing to act as such director, and has (2) (a) signed the Memorandum for his qualification shares, if any; or (b) taken his qualification shares, if any, from the company and paid or agreed to pay for them; or (i) signed and filed with the Registrar an undertaking in writing to take from the company his qualification share, if any, and pay for them; or (ii) made and filed with the Registrar an affidavit to the effect that his qualification shares are registered in his name. Sec. 266 does not apply to a private company. 2.3.5.4. Number of directorships (Sec. 275, 277 to 279) No person to be a director of more than 20 companies (Sec. 275). A person shall not hold office at the same time as director in more than 20 companies. Exclusion of certain directorships (Sec. 278). In calculating the number of companies of which a person may be a director, the following companies shall be excluded, viz., (a) a private company which is neither a subsidiary not a holding company of a public company; (b) an unlimited company; (c) an association not carrying on business for profit or which prohibits the payment of a dividend; and (d) a company in which such person is only an alternate director. Choice of person becoming director of more than 20 companies (Sec. 277). Where a person already holding the office of director in 20 companies is appointed as a director of any other company, the appointment shall not take effect unless such person has, within 15days of his appointment, effectively vacated his office as director in any of the companies in which he was already a director. The new appointment of such person as director shall take effect only if such choice is made; and it shall become void if the choice is not made within 15 days of the day on which the appointment was made.
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2.3.5.5. Disqualifications of directors (Sec. 274) A director must be(a) an individual, (b) competent to contract, and (c) hold a share qualification, if so, required by the Articles. The following persons are disqualified for appointment as directors of a company: (a) A person of unsound mind. (b) An un-discharged insolvent. (c) A person who has applied to be adjudicated as an insolvent and his application is pending. (d) A person who has been convicted by a Tribunal of any offence involving moral turpitude [and sentenced in respect thereof to imprisonment for not less than 6 months], and a period of 5 years has not elapsed from the date of expiry of the sentence. (e) A person whose calls in respect of shares of the company held for more than 6 months, have been in arrear. (f) A person who is disqualified for appointment as director by an order of the Tribunal under Sec. 203 (which deals with power of the Tribunal to restrain fraudulent persons from managing companies) on the ground of fraud or misfeasance in relation to the company. (g) A person who is already a director of a public company which(i) has not filed the annual accounts and annual returns for any three continuous financial years commencing on and after the first day of April, 1999; or (ii) has filed to repay its deposit or interest thereon on due date redeem its debentures on the date or pay dividend and such failure continues for one year or more [Clause (g) has been introduced by the Companies (Amendment) Act, 2000]. The disqualifications mentioned in Clauses (d) and (e) may be removed by the Central Government by notification in the Official Gazette. (h) A private company which is not a subsidiary of a public company may, by its Articles, provide that a person shall be disqualified for appointment as a director on any additional grounds. 2.3.5.6.Vacation of office and removal of directors Vacation of office by directors (Sec. 283). The office of a director shall become vacant if(a) he falls to obtain within 2 months of his appointment, or at any time thereafter ceases to hold, the share qualification, if any, required of him by the Articles of the company; (b) he is adjudged to be of unsound mind; (c) he applies to be adjudicated an insolvent; (d) he is adjudged an insolvent; (e) he is convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than 6 months,
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(f) he fails to pay any call in respect of shares of the company held by him within 6 months from the last date fixed for the payment of the call. The Central Government may, by notification in the Official Gazette, remove this disqualification; (g) he absents himself from 3 consecutive meetings of the Board of directors or from all meetings of the Board for a consecutive period of 3 months, whichever is longer, without obtaining leave of absence from the Board; (h) he (whether by himself or by any person for his benefit or on his account), or any firm in which he is a partner or any private company of which he is a director, accepts a loan, or any guarantee or security for a loan, from the company without the approval of the Central Government, (i) he fails to make disclosures to the Board of directors with regard to any contracts with the company in which he is directly or indirectly interested; (j) he becomes disqualified by an order of the Tribunal from being a director on the ground of having been convicted of an offence in connection with the promotion, formation or management of the company or found guilty of fraud or misfeasance in relation to its winding up proceedings; or (k) he is removed before the expiry of his period of office by an ordinary resolution; or (l) having been appointed a director by virtue of his holding any office or other employment in the company, he ceases to hold such office or other employment in the company. 2.3.5.7. Removal of directors Directors may be removed by1. Shareholders (Sec. 284). The shareholders may remove a director before the expiry of his period of office by passing an ordinary resolution. This does not, however, (a) apply to the case of director appointed by the Central Government under Sec. 408 (which deals with powers of the Central Government to prevent oppression or mismanagement). (b) authorize, in the case of a private company, removal of a director holding office for life on April 1, 1952. (c) apply to the case of a company which has adopted the system of electing 2/3rds of its directors by the principle of proportional representation. Right of the director to make representations: When notice is given of a resolution to remove a director, the director concerned has a right to make representations in writing (not exceeding a reasonable length) to the company. He may also request that these representations be notified to the members of the company. On being so notified, the company shall(a) state the fact of the representations having been made in any notice of the resolution given to the members of the company; and
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(b) send a copy of the representations to every member of the company to whom notice of the meeting is sent (whether before or after receipt of the representations by the company). If a copy of the representations is not sent as aforesaid because they are received too late or because of the companys default, the director may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting. Vacancy- A vacancy created by the removal of a director may be filled up in the same meeting provided special notice of the proposed appointment was also given. The successor can hold office until the date up to which his predecessor would have held office if he had not been removed. If the vacancy is not filled at the meeting, the Board may fill it as a causal vacancy provided the director who has been removed is not appointed. 2. Central Government (Secs. 388-B to 388-E). The Central Government may, in certain circumstances, remove managerial personnel from office on the recommendation of the Tribunal. Case to be made out against the managerial personnel: (Sec. 388-B). The Central Government may state a case against the managerial personnel of a company and refer the same to the Tribunal with a request that the Tribunal may inquire into the case and record a finding whether he is a fit or proper person to hold the office of director or any other office connected with the conduct and management of the company. The Central Government may exercise this power where in its opinion there are circumstances suggesting(a) that any person concerned in the conduct and management of the affairs of the company is or has been guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law, or breach of trust; or (b) that the business of the company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices; or (c) that the company is or has been conducted and managed by the person concerned in a manner which is likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or business to which such company pertains; or (d) that the business of the company is or has been conducted and managed by the person concerned with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose or in manner prejudicial to public interest. The person against whom a case is presented shall be joined as a respondent to the application. The application made by the Central Government to the Tribunal shall contain concise statement of the circumstances and materials as the Central Government may consider necessary for the purpose of the inquiry.
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3. Removal by Tribunal (Sec. 402). Where, on an application to the Tribunal for prevention of oppression (under Sec. 397) or mismanagement (under Sec. 398), the Tribunal finds that the relief ought to be granted, it may terminate, set aside or modify any agreement between the company and the managing director or any other director or the manager. When the appointment of a managerial personnel is so terminated or set aside, he cannot sue the company for damages or compensation for the loss of office, not can he be appointed, except with the leave of the Tribunal, in any managerial capacity in the company for a period of 5 years from the date of the order. 2.3.5.8. Managerial remuneration The expression managerial personnel refers to the (a) managing director, (b) whole-time/part-time directors, or (c) Manager. It excludes executives who are not members of the Board of directors of the company irrespective of salary paid to them. The term whole-time director has not been defined in the Act. The expressions whole-time director and the director in whole-time employment have been used in Secs. 198 and 309 respectively. Overall maximum managerial remuneration (Sec. 198) Remuneration not to exceed 11 per cent. The total managerial remuneration of the directors and the manager in respect of any financial year shall not exceed 11 per cent of the net profit of the company for that financial year computed in the manner laid down in Sec. 349, 350 and 351. The percentage shall be exclusive of the fees payable to the directors for attending the meetings of the Board of directors, or a committee thereof. Within the 11 per cent limit of the maximum remuneration, a company may pay monthly remuneration to its(a) managing or whole-time director in accordance with the provisions of Sec. 309 (which deals with remuneration of directors), or (b) Manager in accordance with the provisions of Sec. 387 (which deals with remuneration of manager). Remuneration in case of nil or inadequate profits-previous approval of Central Government required. If in any financial year a company has no profits or its profits are inadequate, the company shall not pay to its directors, including any managing or whole-time director or manager by way of remuneration any sum (excluding any fees payable to directors) except with the previous approval of the Central Government. This is subject to the provisions of Sec. 269 (which deals with appointment of managing or whole-time director or manager), read with Schedule XIII. Rules regarding directors remuneration Overall remuneration (Sec.198) - The remuneration payable to directors is part of the overall managerial remuneration which cannot exceed 11 per cent of the net profits.
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1. The remuneration payable to the directors (including any managing or whole-time director) shall be determined in accordance with the provisions of Secs. 198 and 309, either by the Articles, or by a resolution passed by the company in general meeting. 2. A director may receive remuneration by way of a fee for each meeting of the Board or a committee of the Board. But fees for attending the meetings of the Board cannot be paid on a monthly basis. 3. A whole-time or managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other. Except with the approval of the Central Government such remuneration shall not exceed 5 per cent of the net profits for one such director, or 10 per cent for all of them in case there is more than one such director. 4. A part-time director may be paid remuneration either(a) by way of the monthly, quarterly, or annual payment with the approval of the Central Government, or (b) by way of commission if the company by a special resolution authorizes such payment. 5. The special resolution (determining remuneration of directors) shall remain in force for a maximum period of 5 years. It may, however, be renewed, from time to time, by a special resolution for further periods of 5 years but no renewal can be affected earlier than 1 year from the date on which it is to come into force. The remuneration paid to part-time directors shall not exceed(i) 1 per cent of the net profits of the company if the company has a managing or whole-time director or a manager, and (ii) 3 per cent of the profits in any other case. However, the company in general meeting may, with the approval of the Central Government, increase these rates of remuneration. 6. The net profits of the company for the purpose of directors remuneration shall be computed in the prescribed manner (as laid down in Sec. 198) without deducting the directors remuneration from the gross profits. 7. If any director receives any sum in excess of remuneration due to him, he shall hold the excess amount in trust for the company and shall refund it to the company. The company cannot waive the recovery of any such sum. 8. A whole-time director or a managing director who receives a commission from the company shall not be entitled to receive a commission or remuneration from any subsidiary of the company. 9. The above rules do not apply to a private company unless it is a subsidiary of a public company. 10. Prohibition of tax-free payment (Sec. 200). A company shall not pay to any officer or employee remuneration free of tax. 2.3.5.9. Loans to directors (Sec. 295) Without obtaining the previous approval of the Central Government, a company (referred to as the lending company) shall not, directly or indirectly, make any loan to136
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(a) (i) any director of the lending company, or (ii) to the directors of its holding company, or (iii) to any partner or relative of any director; (b) any firm in which any such director or relative is a partner; (c) any private company of which any such director is a director or member; (d) any body corporate at whose general meeting any director or directors controls or control not less than 25 per cent of the total voting power; and (e) any body corporate whose Board of directors or manager is accustomed to act in accordance with the directions of the Board of directors, or of any director or directors, of the lending company. Sec. 295 also prohibits a company from(i) giving of any guarantee for a loan taken by a director from any other person and providing of any security for any such loan, and (ii) Providing of any guarantee or security for a loan given by a director to any other person. These restrictions do not apply to any loan made, guarantee given or security provided by a private company (unless it is a subsidiary of a public company), or by a banking company. The exclusion of banking companies makes it clear that loans to directors of a bank are contemplated as part to its business. A holding company may also give loans to its subsidiary. Again, a guarantee or security may also be given by a holding company in respect of any loan made to its subsidiary. 2.3.5.10. Meeting of the directors (Secs. 285 to 288) Directors of a company exercise most of their powers at the meetings of the Board. The Companies Act contains the following provisions relating to Board meetings: 1. Number of meetings once in every 3 months (Sec. 285). In the case of every company (whether public or private) a meeting of its Board of directors shall be held at least once in every 3 months and at least 4 such meetings shall be held in every year. The Central Government may, by notification in the Official Gazette, direct that this provision shall not apply in relation to any class of companies. Example- The meetings of Board of directors of Cherry Ltd., a public company, were held on 1st January, 30th June, 1st July, and 31st December, during the calendar year 1999. The requirements of Sec. 285 are met as one meeting was held in each quarter and 4 such meetings were held during the year. 1. Notice of meetings (Sec. 286). Notice of every meeting of the Board of directors of a company shall be given in writing to every director for the time being in India, and at his usual address in India. 2. Quorum for meetings (Sec. 287). The quorum for a meeting of the Board shall be 1/3rd of its strength (any fraction contained in that 1/3rd being rounded off as one), or 2 directors, whichever is higher.
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Want of quorum (Sec. 288). If a meeting of the Board cannot be held for want of quorum, it shall automatically stand adjourned till the same day in the next week, at the same time and place unless the Articles provide otherwise. If the day in the next week happens to be a public holiday, the adjourned meeting shall be held on the day following the public holiday. Sec. 288 does not say what is to become of the adjourned meeting if there is no quorum at that meeting also. Where a meeting of the Board is called but could not be held for want of quorum, there shall be no contravention of Sec. 285. 2.3.5.11. Powers of directors General Powers of the Board (Sec. 291). The Board of directors of a company is entitled to exercise all such powers and to do all such acts and things as the company is authorized to exercise and do. This means the powers of the Board of directors are co-extensive with those of the company. This proposition is, however, subject to two conditions: First, the Board shall not do any act which is to be done by the company in general meeting. Second, the Board shall exercise its powers subject to the provisions contained in the Companies Act, or in the Memorandum or the Articles of the company or in any regulations made by the company in general meeting. But no regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made. Powers to be exercised at Board meetings (Sec. 292)- The Board of directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at the meetings of the Board, viz., the power tomake calls on shareholders in respect of money unpaid on their shares; issue debentures; borrow moneys otherwise than on debentures (say through public deposits); invest the funds of the company; and make loans.

The Board may, by a resolution passed at a meeting, delegate the last three powers to a committee of directors or the manager or any other principal officer of the company, but the Board shall specify the limits of such delegation. Sec. 292 does not in any manner affect the right of the company in general meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified in Sec. 292. Powers to be exercised with the approval of company in general meeting (Sec. 293). The Board of directors of a public company, or of a private company which is a subsidiary of a public company, shall exercise the following powers only with the consent of the company in general meeting:
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(a) To sell, lease or otherwise dispose of (say under amalgamation scheme) the whole, or substantially the whole, of the undertaking of the company. (b) To remit or give time for repayment of any debt due to the company by a director except in the case of renewal or continuance of an advance made by a banking company to its director in the ordinary course of business. (c) To invest (excluding trust securities) the amount of compensation received by the company in respect of the compulsory acquisition of any undertaking or property of the company. (d) To borrow moneys where the moneys to be borrowed (together with the moneys already borrowed by the company) are more than the paid-up capital of the company and its free reserves (that is to say reserves not set apart for any specific purpose, e.g., balance in the share premium account, general reserve, profit and loss account, capital redemption account). The amount of temporary loans raised from banks in the ordinary course of business is excluded. The expression temporary loans does not include loans raised for the purpose of financing expenditure of a capital nature. (e) To contribute to charitable and other funds not directly relating to the business of the company or the welfare of its employees, amounts exceeding in any financial year Rs. 50,000 or 5 per cent of the average net profits of the three preceding financial years, whichever is greater. The Board may contribute up to Rs. 50,000 even if the company is incurring a loss. Every resolution passed by the company in general meeting to borrow moneys shall specify the total amount up to which money may be borrowed by the Board of directors. Likewise every resolution passed by the company in general meeting to contribute to charitable and other funds shall specify the total amount which may be contributed to charitable and other funds in any financial year. 2.3.5.12. Political contributions (Sec. 293-A) With a view to permitting the corporate sector to play a legitimate role within the defined norms in the functioning of our democracy, Sec. 293A allows companies to make contributions to political parties or for political purposes to any person, directly or indirectly, out of their profits. Sec. 293-A however prohibits political contributions (to any political party or for any political purpose to any person, whether directly or indirectly) in the case of (a) Government companies, and (b) Companies which have been in existence for less than 3 financial years. Any other company may contribute any amount or amounts, directly or indirectly, (a) to any political party, or (b) for any political purpose to any person. This is however subject to the following conditions: 1. The amount or aggregate of the amounts so contributed by a company in any financial year shall not exceed 5 per cent of its average net profits during the three immediately preceding financial years.
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2. Before any such contribution is made by the company, a resolution authorizing the making of the contribution shall be passed at a meeting of the Board of directors. Such resolution shall be deemed to be justification in law for the making of the contribution authorized by it. 3. The company shall disclose in its profit and loss account the amount or amounts of such contributions during the financial year to which that account relates, giving (a) particulars of the total amount contributed, and (b) the name of the party or person to which or to whom such amount has been contributed. 2.3.5.13 Duties of directors The statutory duties of directors have been discussed at appropriate places. Again, there are certain duties of a general nature of the following type: 1. Fiduciary duties, and 2. Duties of care, skill and diligence. 1. Fiduciary duties: As fiduciaries, the directors must(a) exercise their powers honestly and bona fide for the benefit of the company as a whole; and (b) not place themselves in a position in which there is a conflict between their duties to the company and their personal interests. They must not make any secret profit out of their position. If they do, they have to account for it to the company. Fiduciary duties owed to the company. The fiduciary duties of directors are owed to the company and not to the individual shareholders. The leading case on the point is Percival v. Wright, (1902) a Ch. 421, already discussed in this unit. 2. Duties of care, skill and diligence: Directors should carry out their duties with reasonable care and exercise such degree of skill and diligence as is reasonably expected of persona of their knowledge and status. He is not bound to bring any special qualifications to his office. 3. Standard of care: The standard of care, skill, and diligence depends upon the nature of the companys business and circumstances of the case. There are various standards of the care depending upon: (a) (b) (c) (d) the type and nature of work; division of powers between directors and other officers; general usages and customs in that type of business; and whether directors work gratuitously or remuneratively.
There is a brilliant exposition of directors duties in relation to a companys affairs in the following case: City Equitable Fire Insurance Co. Ltd, Re, supra. The directors of an insurance company left the management of the companys affairs almost entirely in the hands of B, the managing director. Owing to Bs fraud a large amount of the companys assets disappeared. B and the firm in
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which he was a partner had taken a huge loan from the company and the cash at the bank or in hand included, pound 7,300 in the hands of the companys stock brokers, in which B was partner. The directors never inquired as to how these items were made up. Held, the directors were negligent. The Articles, however, protected the directors in this case from liability as there was no willful neglect or default and consequently they were not held liable. Other duties of directors: The other duties of a director are(1) to attend Board meetings. (2) not to delegate his functions except to the extent authorized by the Act or the constitution of the company, and (3) to disclose his interest. These duties have been discussed at appropriate places. Contracts in which directors are interested A director stands in a fiduciary position towards the company. Therefore, if he has any personal interest in a contract entered in to with the company, he must disclose it. The principle behind a directors duty of disclosure is that he is precluded from dealing on behalf of the company with himself and from entering into engagements in which he has a personal interest conflicting, or which possibly may conflict, with the interest of those whom he is by fiduciary duty bound to protect. [North West Transportation Co. V. Beauty, (1887) 12 App. Cas. 589]. Boards sanction required (Sec. 297), except with consent of the Board of directors of a company, a director shall not enter into any contract with the company(1) for the sale, purchase or supply of any goods, materials, or services; or (2) for underwriting the subscription of any shares in, or debentures of, the company. These restrictions also apply to (a) the relatives of the director, (b) a firm in which such a director or relative is a partner, (c) any other partner in such a firm, or (d) a private company of which the director is a member or director. Where the paid-up share capital of a company is not less than Rs.1 crore the aforesaid contract can be entered into only with the previous approval of the Central Government. Exceptions: The rule contained in Clause (1) does not apply to or affect(a) contracts for the purchase of goods and materials from the company or the sale of goods and materials to the company, for cash at prevailing market prices; or
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(b) contracts between the company on one side and any director, relative, firm, partner or private company on the other for the sale, purchase or supply of goods, materials, and services in which either of the parties regularly trades or does business, provided the value of the goods does not exceed Rs. 5,000 in any year; or (c) any transaction of banking or insurance company in the ordinary course of business. Disclosure of interest by director (Sec.299). Every director of a company who is directly or indirectly concerned or interested in a contract or proposed contract entered into, or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of directors. In the case of a proposed contract, such disclosure shall be made by a director at the meeting of the Board at which the question of entering into the contract or agreement is first taken into consideration. In the case of any other contract or arrangement the required disclosure shall be made at the first meeting of the Board held after the director becomes interested in the contract. For this purpose the director shall give a notice to the Board to this effect. This is deemed to be sufficient disclosure of concern or interest in relation to any contract so made. Any such general notice shall expire at the end of the financial year in which it is given. But it may be further renewed. The notice shall not be of any effect unless it is given steps to ensure that it is brought up and read at the first meeting of the Board after it is given. Interested director not to participate or vote in Boards proceedings (Sec. 300). A director of a company must not place himself in a position in which his personal interest conflicts with his duty [Parker v. Mckenna, (1874) 10 Ch. App. 96]. This conflict would invariably arise when a director is personally interested in a transaction entered into with or by the company. As such, he must not take any part in the discussion of, or vote as a director on, any contract or arrangement in which he is directly or indirectly int erested unless authorized by t he companys Articles. In case he votes, his vote would not be counted. Not only this, even his presence would not count towards the quorum for the transaction of business the provisions of Sec. 300 shall be punishable with fine which may extend to Rs. 50,000. 2.3.5.14. Register of contracts (Sec. 301). Every company shall keep one or more registers in which shall be entered separately particulars of all contracts entered into by the company in which any of the directors is interested. The following particulars, to the extent they are applicable in each case, shall be given in the register: (a) (b) (c) (d) (e) the date of the contract or arrangement; the names of the parties thereto; the principal terms and conditions thereof; the date on which it was placed before the Board of directors; the names of the directors voting for and against the contract and the names of those remaining neutral.
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The register aforesaid shall be placed before the next meeting of the Board of directors and shall then be signed by all the directors present at the meeting. Inspection of register- The register shall be kept at the registered office of the company and shall also be open to the inspection of any member of the company and extracts may be taken there from and copies thereof may be required by any member of the company. 2.3.5.15. Liabilities of directors The liabilities of directors may be discussed under the following four heads: 1. Liability to third parties. This may arise(1) Under the Act. Liability of directors to third parties may arise in connection with the issue of a prospectus which does not contain the particulars required by the Companies Act, or which contains material misrepresentation. Directors may also incur personal liability(a) on their failure to repay application money if minimum subscription has not been subscribed (Sec. 69). (b) On an irregular allotment of shares to an allottee (and likewise to the company) if loss or damage is sustained (Sec. 71). (c) On their failure to repay application money if the application for the securities to be dealt in on a recognized stock exchange is not made or is refused (Sec. 73). (d) On failure by the company to pay a bill of exchange, hundi, promissory note, cheque or order for money or goods wherein the name of the company is not mentioned in legible characters (Sec. 147). (2) Independently of the Act. Directors, as agents of a company, are not personally liable on contracts entered into as agents on behalf of the company. But there are a number of exceptions to this rule. If a director fails to exclude personal liability, for instance, by signing a negotiable instrument without mentioning the companys name and the fact that he is signing on companys behalf, he is personally liable to the holder of such instrument. He is also personally liable if he acts in his own name. 2. Liability to the company. The liability of director towards the company may arise from(1) Ultra vires acts : Directors are personally liable to the company in respect of ultra vires acts and it is not necessary to prove fraud in such cases, e.g., when they pay dividends out of capital or when they dissipate the funds of the company in ultra vires transactions. They are liable jointly and severally and, inter se, they have a right to ratable contribution.
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(2) Negligence : A director may incur liability for the negligence in the exercise of his duties. There is no statutory definition of negligence, and as such each case has to be decided after due consideration of the particular facts thereof. The question to be answered in each case is: Has the director exercised the necessary care and shown the necessary diligence in the discharge of his duties? If he has not, he is liable. If he has, there can be no question of liability. It is essential in an action for negligence that the company suffers some damage, as negligence without damage or damage without negligence is not actionable. (3) Breach of trust : Directors of a company, being in a fiduciary position, hold the position of trustees as regards its money and property which comes into their hands and of the powers entrusted to them by the Articles. They must discharge their duties as such trustees in the best interest of the company. They are liable to the company for any loss resulting from breach of trust. Directors are also accountable to the company for any secret profits they might have made in transactions on behalf of the company. (4) Misfeasance : Directors are liable to the company for misfeasance which means willful misconduct of directors for which they may be sued in a Law Court. In case of misfeasance proceedings the directors may apply for relief under Sec. 633. 3. Liability for breach of statutory duties. There are numerous statutory duties of directors which they must carry out. Most of these duties relate to maintenance of proper accounts, filing of returns or observance of certain statutory formalities. If they fail to perform these duties, they render themselves liable to penalties. 4. Liability for acts of his co-directors. A director is not liable for the acts of his co-directors provided he has no knowledge and he is not a party. His co-directors are not his servants or agents who can by their acts impose liability on him. Validity of acts of directors (Sec. 290) Acts done by a person as director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in the Articles. De facto and de jure directors. A director who is not duly appointed but acts as a director is known as a de facto director and is as much liable as a de jure (properly appointed) director. Thus as between a company and third persons a de facto director is a de jure director [Hope Mills v. Sir Kowasji, (1910) 13 Bom. L.R. 748]. Dawson v. African Consolidated Land & Trading Co., (1898) 1 Ch. 6. The Articles of a company contained a clause similar to Article 80 of
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Table A. Three of the directors made a call. One of the directors happened to be disqualified by having parted with his qualification shares for a few days. Held, the call was valid. Sec. 290 does not validate the acts which could not have been done even by a properly appointed director or the acts of a director who knows of the irregularly of his appointment. Craven-Ellis v. Canons Ltd., (1936) 2 K.B. 403. The Articles of a company empowered the directors to appoint a managing director. C was appointed as managing director by the Board of directors, none of whom had acquired the qualification shares. C acted as managing director for 1 year without acquiring any qualification shares. Held, Cs appointment as managing director was invalid as he did not hold any qualification shares. 2.3.5.16. Disabilities of directors In order to protect the interest of a company and its shareholders, the Companies Act has imposed the following disabilities on the directors: 1. Avoidance of provisions relieving directors of liability (Sec. 201). Any provision in the Articles or an agreement which exempts a director (including any officer of the company or an auditor) from any liability on account of any negligence, default, and misfeasance, breach of duty or breach of trust by him shall be wholly void. 2. Undercharged insolvent disqualified from being appointed director (Sec. 274). An undercharged insolvent shall not be appointed to act as director of any company or in any way to take part in the management of any company. 3. No person to be director of more than 20 companies (Sec. 275). No person shall hold office at the same time as director in more than 20 companies. 4. Restrictions on powers of Board (Sec. 293). These have already been discussed in this Chapter. 5. Loans to directors (Sec. 295). 6. Boards sanction for certain contracts in which particular directors are interested (Sec. 297). 7. Prohibition of assignment of office by director (Sec. 312). A director shall not assign his office. If he does, the assignment shall be void. 8. Directors, etc, not to hold office or place of profit (Sec. 314). The following persons shall not hold any office or place of profit in a company except with the consent of the company accorded by special resolution; (1) Any director of the company. (2) (a) Any partner or relative of such a director, (b) Any firm in which such a director or his relative is a partner, (c) Any private company of which such a director is a director or member, or any director or manager of such a company if the office of profit carries a total monthly remuneration of such as may be prescribed. (The sum prescribed with effect from 26th March, 1992 is Rs. 6,000).
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Special resolution- Special resolution is necessary for every appointment in the first instance and for every subsequent appointment. It is sufficient if the special resolution according the consent of the company is passed at a general meeting of the company held for the first time after the holding of such office or place of profit. 2.3.5.17. Managing Director A Managing Director means A director who is entrusted with substantial powers of management which would not otherwise be exercisable by him. These powers may be conferred upon him by virtue of an agreement with t he company or a reso lution passed by the Memorandum or Articles of Association. The term Managing Director includes a director occupying the position of a managing director, by whatever name called. But the power to do administrative acts of a routing 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 endorse any negotiable instrument or to sign any share certificate or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management. Further, the managing director shall exercise his powers subject to superintendence, control and direction of its Board of directors [Sec. 2 (26)]. He is a whole-time director and is the chief executive of the company. Appointment (Sec. 269). Compulsory appointment of managing or whole-time director or manager. Every public company or a private company which is a subsidiary of a public company having a paid-up share capital of Rs. 5 crores or more shall have a managing or wholetime director or a manager. Prior approval of the Central Government unless appointment is in accordance with the conditions specified in Schedule XIII. No such appointment shall be made except with the prior approval of the Central Government. However, no such approval is required where the appointment is made in accordance with the conditions specified in Schedule XIII. Schedule XIII prescribes conditions to be fulfilled for the appointment of a managing or whole-time director or manager without the approval of the Central Government. It also lays down the remuneration payable to managerial personnel. Approval of the Central Government is not required in the case of appointment of managerial personnel made on or after 15th day of June, 1988 (the date when the amended provisions of Sec. 269 were enforced), in accordance with the conditions specified in Schedule XIII to the Act. Provisions relating to appointment where it requires approval of the Central Government. (1) Every application seeking approval to the
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appointment of a managing or whole-time director or manager shall be made to the Central Government within a period of 90 days from the date of such appointment. (2) The Central Government shall not accord its approval to the application if it is satisfied that(a) the managing or whole-time director or the manager appointed is, in its opinion, not a fit and proper person to be appointed as such or such appointment is not in the public interest; or (b) the terms and conditions of the appointment of the managing or wholetime director or the manager are not fair and reasonable. (3) The Central Government may accord approval for a period lesser than the period for which the appointment is proposed to be made. If the appointment is not approved by the Central Government, the person appointed shall vacate his office on the date on which the decision of the Central Government is communicated to the company. If he omits or fails to vacate his office, he shall be punishable with fine which may extend to Rs. 5,000 for every day during which he omits or fails to vacate such office. Appointment in contravention of the requirements of Schedule XIII- An appointment without the approval of the Central Government may sometimes be made by a company, in contravention of the requirements of Schedule XIII. In such a case if the Central Government suo motto or on any information received by it is prima facie of the opinion that such an invalid appointment has been made, the Central Government may refer the matter to the Tribunal. On receipt of such a reference, the Tribunal shall issue a notice to (a) the company, (b) the managing or whole-time director or the manager, as the case may be, (c) and the director or other officer responsible for complying with the requirements of Schedule XIII, to show cause as to why such appointment shall not be terminated and the penalties provided under Sec. 269 shall not be imposed. Disqualifications of the Managing Director (Sec. 267). No person shall be appointed a managing or whole-time director who(a) is an undercharged insolvent, or has at any time been adjudged an insolvent; (b) suspends, or has at any time suspended, payment to his creditors, or makes, or has at any time made, composition with them.; or (c) is, or has at any time been, convicted by a Tribunal of an offence involving moral turpitude. The disqualifications which apply to the directors (Sec. 274) also apply to the managing director. Number of managing directorships (Sec. 316). It cannot exceed two. Any person may be appointed as a managing director in a public company or in a private company which is a subsidiary of a public company, provided he is not holding the office of the managing director or the manager in any other company (including a private company which is not a subsidiary of a public company). He can, however, hold such office in any number of private companies which are not subsidiaries of public companies.
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A public company or a private company which is a subsidiary of a public company may appoint or employ a person as its managing director if he is the managing director or manager of one, and not more than one, other company (including a private company which is not a subsidiary of a public company). But any such appointment shall be approved by a resolution passed at a meeting of the Board of directors with the consent of all the directors present at the meeting. Specific notice of such a meeting and the resolution shall also be given to all the directors then in India. The object of this provision is that efficiency of a person who is managing a company should not be affected by his being in management of more than two companies. Thus a person may hold the office of managing director in not more than two companies simultaneously. Central Government may permit a person to be managing director of more than two companies. The Central Government may permit any person to be appointed as a managing director of more than two companies if it is satisfied that it is necessary that the companies should, for their proper working, function as a single unit and have a common managing director. Term of office (Sec. 317). It cannot exceed 5 years at a time. The maximum term of appointment of a managing director can be 5 years at a time. There is nothing to prohibit reappointment, re-employment or the extension of the term of office of the managing director. But any such new term shall not be sanctioned earlier than 2 years from the date on which it is to come into force. Sec. 317 does not apply to a private company which is not a subsidiary of a public company. 2.3.5.18. Manager Manager, according to Sec. 2 (24), means an individual who has the management of the whole or substantially the whole of the affairs of a company. He is subject to the superintendence, control and direction of the Board of directors. Manager includes a director or any other person occupying the position of a manager, by whatever name called, and whether under a contract of service or not. Provisions of the Act regarding manager 1. Firm or body corporate not to be appointed manager (Sec. 384). No company shall employ a firm, or a body corporate or association as its manager. 2. Certain persons not to be appointed managers (Sec. 385). No company shall appoint or employ any person as its manager who(a) suspends, or has at any time within the preceding 5 years been adjudged an insolvent; or (b) suspends, or has at any time within the preceding 5 years suspended, payment to his creditors, or makes, or has at any time within the preceding 5 years made, a composition with them; or
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(c) has at any time within the preceding 5 years been, convicted by a Court in India of an offence involving moral turpitude. The Central Government may, be notification in the Official Gazette, remove these disqualifications, either generally or in relation to any company or companies specified in the notification. 3. Number of companies of which a person may be appointed manager (Sec. 386)- No company shall employ or appoint any person as manager, if he is either the manager or the managing director of any other company. However, a company may appoint or employ a person as its manager, if he is the manager or managing director of one, and not more than one, other company. But such appointment or employment shall be made or approved by a resolution passed by a directors present at the meeting. 4. Remuneration of manager (Sec. 387)- The manager of a company may, subject to the overall limit of managerial remuneration, receive remuneration either by way of a monthly payment or by a way of a specified percentage of the net profits of the company. Except with the approval of the Central Government, such remuneration shall not exceed in the aggregate 5 per cent of the net profits of the company. 5. Application of Secs! 269, 310, 311, 312 and 317 to managers (Sec. 388)- (a) Appointment or re-appointment of a manager to require approval of Central Government. The appointment or re-appointment of a person as manager in the case of public company or a private company, which is a subsidiary of a public company, shall have effect only when approved by the Central Government (Sec. 269 as applicable to managers). (b) Increase in remuneration to require approval of Central Government. Any change in the regulations of the company or any agreement, by which the remuneration of a manager is increased, shall require the previous approval of the Central Government (Secs. 310 and 311 as applicable to managers). (c) Office of manager not to be assigned- The office of a manager, like that of a director, shall not be assigned (Sec. 312 as applicable to managers). (d) Manager not to be appointed for more than 5 years at a time- A manager, like a managing director, shall not be appointed for a term exceeding 5 years at a time (Sec. 317 as applicable to managers). Secs. 386, 387 and 388 do not apply to a private company unless it is a subsidiary of a public company (Sec. 388-A). Sec. 293-A however prohibits political contributions (to any political party or for any political purpose to any person, whether directly or indirectly) in the case of (a) Government Companies and (b) Companies which have been in existence for less than 3 financial years.
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Any other company may contribute any amount or amounts, directly or indirectly, (a) to any political party, or (b) for any political purpose to any person. This is however subject to the following conditions: 4. The amount or aggregate of the amounts so contributed by a company in any financial year shall not exceed 5 per cent of its average net profits during the three immediately preceding financial years. 5. Before any such contribution is made by the company, a resolution authorizing the making of the contribution shall be passed at a meeting of the Board of directors. Such resolution shall be deemed to be justification in law for the making of the contribution authorized by it. 6. The company shall disclose in its profit and loss account the amount or amounts of such contributions during the financial year to which that account relates, giving (a) particulars of the total amount contributed, and (b) the name of the party or person to which or to whom such amount has been contributed. 2.4. Winding Up of Companies 2.4.1 Meaning of winding up Winding up or liquidation of a company represents the last stage in its life. It means a proceeding by which a company is dissolved. The assets of the company are disposed of, the debts are paid off out of the realized assets (or from contributions from its members), and the surplus, if any, is then distributed among the members in proportion to their holdings in the company. The two terms winding up and liquidation are used interchangeably. According to Prof. Gower, winding up of a company is a process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator, called liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights. 2.4.2 Modes of winding up There are two modes of winding up of a company, viz., 1. 2. (1) (2) Winding up by the Tribunal (Secs. 433 to 483). Voluntary winding up (Secs. 484 to 521). This may bemembers voluntary winding up, or Creditors voluntary winding up.
Winding up by the tribunal (Secs. 433 to 483) Winding up of a company under the order of a Tribunal is also known as compulsory winding up. Grounds for compulsory winding up (Sec. 433) A company may be wound up by the Tribunal in the following cases:
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1. Special resolution of the company [Sec. 433 (a)]. Winding up order under this head is not common because normally the members of a company prefer to wind up the company voluntarily for in such a case they shall have a voice in its winding up. Moreover, a voluntary winding up is far cheaper and speedier than a winding up by the Tribunal. 2. Default in delivering the statutory report to the Registrar or in holding statutory meeting [Sec. 433 (b)]. A petition on this ground can be made either by the Registrar or by a contributory. In the latter case the petition for winding up can be filed only after the expiry of 14 days from the day on which the statutory meeting ought to have been held [Sec. 439 (7)]. The Tribunal may, instead of making a winding up order, direct that the statutory report is delivered or that a statutory meeting is held. The Tribunal may order the costs to be paid by any persona who are responsible for the default [Sec. 443 (3)]. 3. Failure to commence, or suspension of business [Sec. 433 (c)]. The Tribunal exercises power in this case only if the company has no intention of carrying on its business or if it is not possible for it to carry on its business. If a company has not begun to carry on business within a year from its incorporation or suspends its business for a whole year, the Tribunal will not wind it up if (a) there are reasonable prospects of the company starting business within a reasonable time, and (b) there are good reasons for the delay, i.e., the suspension of business is satisfactorily accounted for and appears to be due to temporary causes. 4. Reduction in membership [Sec. 433 (d)]. If, at any time, the number of members of a company is reduced in the case of a public company, below 7 or in the case of private company, below 2, the company may be ordered to be wound up by the Tribunal. If the company carries on business for more than 6 months while the number is so reduced every member who is cognizant of the fact that it is carrying on business with members fewer than the statutory minimum, will be severally liable for the payment of the whole of the debts of the company contracted after those 6 months (Sec. 45). 5. Inability to pay its debts [Sec. 433 (e)]. A company may be wound up by the Tribunal if it is unable to pay its debts. The test is whether the company has reached a stage where it is commercially insolventthat is to say, that its existing and probable assets would be insufficient to meet the existing liabilities. Commercially insolvent- means that the company is unable to pay debts or liabilities as they arise in the ordinary course of business. When is a company unable to pay its debts? According to Sec. 434, a company shall be deemed to be unable to pay its debts in the following cases:
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(1) Demand for payment neglected. If a creditor to whom the company is indebted for a sum exceeding Rs. 1,00,000 has served on the company, at its registered office, a demand for payment and the company has for 3 weeks thereafter neglected to pay or otherwise satisfy him, the company is unable to pay its debts. The demand may be signed by any agent or legal adviser duly authorized or in the case of a firm, by such agent or legal adviser or by any member of the firm. (2) Decreed debt unsatisfied. If execution or other process issued on a decree or order of any Tribunal in favor of a creditor of the company is returned unsatisfied in whole or in part, the company is deemed to be unable to pay its debt. (3) Commercial insolvency. A company is deemed to be unable to pay its debts, if it is proved to the satisfaction of the Tribunal that the company is unable to pay its debts. In determining whether a company is unable to pay its debts, the Tribunal shall take into account the contingent and prospective liabilities of the company also. 6. Just and equitable [Sec. 433 (f)]. The words just and equitable are of the widest significance and do not limit the jurisdiction of the Tribunal to any particular case. The principle of just and equitable clause baffles a precise definition. It must rest with the judicial discretion of the Tribunal depending upon the facts and circumstances of each [Hind Overseas (Pvt.) Ltd. v. R.P. Jhunjhunwalla, (1976) 46 Comp. Cas. 91 (S.C.)]. What is just and equitable clause? It depends upon the facts of each case. The Tribunal may order winding up under the just and equitable clause in the following cases: (1) When the substratum of a company is gone. The substratum of a company can be said to have disappeared only when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. (i) When the very basis for the survival of the company is gone. Pirie v. Stewart, (1904) 6 F. 847. A shipping company lost its only ship, the remaining asset being a paltry sum of pound 363. A majority in number and value of shareholder opposed this and desired to carry on the business as charter. Held, it was just and equitable that the company should be would up. (ii) When the main object of the company has substantially failed or become impracticable. Where a companys main object fails, its substratum is gone and it may be would up even though it is carrying on its business in pursuit of a subsidiary object. German Date Coffee Co., Re (1882) 20 Ch. D. 169. In this case, the objects clause of the German Date Coffee Co. stated that it was formed for the working of a German patent which would be granted for making a partial substitute for coffee from dates and for the acquisition of inventions incidental thereto and also other inventions for similar purposes. The German patent was never granted but the company did acquire and work a Swedish patent and carried on business at Hamburg where a
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(iii)
(2)
(3)
(4)
(5) (6) (7)
(8)
substitute coffee was made from dates, but not under the protection of a patent. Held, on a petition by 2 shareholders, that the main object could not be achieved and, therefore, it was just and equitable that the company should be would up. When the existing and probable assets of the company are insufficient to meet its existing liabilities. Where a company is totally unable to pay off creditors and there is ever-increasing burden of interest and deteriorating state of management and control of business owing to sharp differences between shareholders, the Tribunal will order winding up. When the management is carried on in such a way that the minority is disregarded or oppressed. Oppression of minority shareholders will be a just and equitable ground where those who contribute company abuse their power to such an extent as to seriously prejudice the interest of minority shareholders. Where there is a deadlock in the management of the company. When shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground. Yenidje Tobacco Co. Ltd., Re (1916) 2 Ch. 426. A and B were the only shareholders and directors of a company with equal rights of management and voting power. After a time they became bitterly hostile to each other and disagreed about the appointment of important servants of the company. All communication between them was made through the secretary as they were not so speaking terms with each other. The company made large profits in spite of the disagreement. Held, there was a complete deadlock in the management and the company was ordered to be wound up. Where public interest is likely to be prejudiced. Having regard to the provisions of Sec. 397 and 398 (dealing with prevention of oppression and mismanagement) where the concept of prejudice to public interest is introduced, it would appear that the Tribunal winding up a company will have to take to into consideration not only the interest of shareholders and creditors but also public interest in the shape of need of the community, interest of the employees, etc. When the company was formed to carry out fraudulent or illegal business or when the business of the company becomes illegal. When the company is a mere bubble and does not carry on any business or does not have any property [London & County Coal Co., Re (1867) L.R. 3 Eq. 355]. Acting against the interest of the State. If the company has acted against the interests of the sovereignty and integrity of India, the security of the state, friendly relations with foreign states, public order, decency or morality. Winding up of a sick company. If the tribunal is of the opinion that the company should be wound up under the circumstances specified in Sec. 424G. The last two clauses in Sec. 333(i) have been added by the Companies (Amendment) Act, 2002.
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2.4.3. Petition (Sec. 439) An application to the Tribunal for the winding up of a company is made by a petition. A petition for the winding up of a company may be presented, subject to the provisions of this Section, in the following cases: 1. Petition by the company [Sec. 439 (1) (a)]. A company may itself present a petition to the Tribunal for winding up after it has passed a special resolution. A company does not often present a petition to have itself wound up by the Tribunal as it can achieve this object more conveniently by passing a special resolution to wind up voluntarily. 2. Petition by any creditor or creditors [Sec. 439 (1) (b)]. A petition to the Tribunal for the winding up of a company may be filed by any creditor or creditors. The term creditor is not limited to one to whom a debt is due at the date of the petition and who can demand immediate payment. Every person having a pecuniary claim against the company whether actual or contingent is a creditor and such a person is competent to file a petition for the winding up of the company. 3. Petition by any contributory or contributories [Sec. 439 (1) (c)]. A contributory means a person liable to contribute to the assets of the company on the event of its being wound up and includes the holder of shares which are fully paid-up. He can present a petition for winding up a company; even though he may be the holder of fully paid-up shares or that the company may have no assets at all, or may have no surplus assets left for distribution among the shareholders, after satisfaction of its liabilities. A contributory can present a winding up petition if(a) (b) (c) (d) 4. the membership is reduced below the statutory minimum; or he is an original allottee of shares; or he has held his shares for any out of the previous 18 months; or the shares have devolved on him through the death of a former holder. Petition by all or any of the prior parties whether together or separately [Sec. 439 (1) (d)]. A petition for the winding up of a company under Sec. 433 may be presented by all or any of the parties, namely, the company, the creditors or the contributories specified in Sec. 433 (a), (b) and (c) whether together or separately. Petition by the Registrar [Sec. 439 (1) (e)]. The Registrar can present for winding up a company on the following grounds only, viz, If default is made by the company in delivering the statutory report to the Registrar or in holding the statutory meeting. If the company does not commence its business within a year from its incorporation, or suspends its business for a whole year. If the number of members is reduced in the case of a public company below 7 and in the case of a private company below 2. If the company is unable to pay its debts. If the Tribunal is of opinion that it is just and equitable that the company should be wound up.
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6. Petition by the Central Government [Sec. 439 (1) (f)]. Under Sec. 243 the Central Government may cause to be presented to the Tribunal (by any person authorized by it in this behalf) a petition for the winding up of a company where it appears from the report of Inspectors appointed to investigate the affairs of the company under Sec. 235 that (1) (a) (b) (c) (d) the business of the company is being conducted with intent todefraud its creditors, members, or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose; or (2) persons concerned in the formation of the company or the management of its affairs have been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members. 2.4.4. Commencement of winding up (Sec. 441) Where, before the presentation of a petition for the winding up of a company by the Tribunal, a resolution has been passed by the company for voluntary winding up, the winding up shall be deemed to have commenced from the date of the resolution. In all other cases (i.e., where the company has not previously passed a resolution for voluntary winding up) the winding up of the company by the Court shall be deemed to commence at the time of the presentation of the petition for the winding up. When an order is made for winding up, it relates back to the date of the presentation of the petition. If no order for winding up is made and the winding up petition is dismissed, the date of the presentation of the winding up petition has no relevance. As such until winding up order is made, the company has to comply with the requirements of the Companies Act 1956 as are required of a company not wound up.Advertisement of petition. Every petition for winding up a company shall be advertised 14 days before the hearing, stating the date on which the petition was presented and the names and addresses of petitioners. 2.4.5. Powers of tribunal Power of Tribunal to stay or restrain proceedings against company (Sec. 442). At any time after the presentation of a winding of petition and before a winding up order has been made, the company, or any creditor or contributory may apply to the Tribunal for a stay of, or restraint of, further proceedings in the Tribunal. Powers of Court on hearing petition (Sec. 443) On hearing a winding up petition, the Tribunal may(a) (b) (c) (d) dismiss it, with or without costs; or adjourn the hearing conditionally or unconditionally; or make any interim order that it thinks fit; or make an order for winding up the company with or without costs or any other order as it thinks fit.
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The Tribunal shall not refuse to make a winding up order merely because the assets have been fully mortgaged or because there are no assets at all. Where the petition is presented on the ground that it is just and equitable that the company should be would up, the Tribunal may refuse to make a winding up order if the petitioners are acting unreasonably in seeking to have the company wound up instead of pursuing some other remedy available to them. 2.4.6. Consequences of winding up order Once the Tribunal makes an order for the winding up of a company, its consequences date back to the commencement of winding up. The other consequences of winding up by the Tribunal are as follows: 1. Intimation to Official Liquidator and Registrar (Sec. 444). Where the Tribunal makes an order for the winding up of a company, it shall forthwith cause intimation to be sent to the Official Liquidator and the Registrar of the order of winding up. 2. Copy of winding up order to be filed with the Registrar [Sec. 455 (1), (1-A) and (2)]. On the making of the winding up order it shall be the duty of the petitioner and of the company to file with the Registrar within 30 days a certified copy of the order. 3. Order for winding up deemed to be notice of discharge [Sec. 455 (3)]. The order for winding up shall be deemed to be notice discharge to the officers and employees of the company, except when the business of the company is continued. Where a servant of the company is on a contract of service for a fixed term and that term has not expired on the date of the order of the winding up of the company, the order operates as a wrongful discharge and damages are allowed for breach of contract of service and the servant is free from his agreement not to compete with the company. 4. Suits Stayed [Sec. 446 (1)]. When the tribunal has been made, no suit or other legal proceeding shall be commenced against the company except by leave of the Tribunal. Similarly pending suits shall not be proceeded with except by leave of the Tribunal. 5. Powers of the Tribunal [Sec. 446 (2) and (3)]. Where the Tribunal is winding up the company, shall have jurisdiction to entertain, or dispose of(a) any suit or proceeding by or against the company; (b) any claim made by or against the company; (c) any application made under Sec. 391 for compromise with creditors and / or members; (d) any question of priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in course of the winding up of the company. 6. Effect of winding up order (Sec. 447). An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on their joint petition. 7. Official Liquidator to be liquidator (Sec. 449). On a winding up order
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being made in respect of a company, the Official Liquidator shall, by virtue of his office, become the liquidator of the company. 2.4.7. Procedure of winding up by the tribunal Official Liquidator [Sec. 448 as amended by the Companies (Second Amendment) Act 2002]. For the purpose of winding up of companies by the Tribunal, there may be appointed an official liquidator who(a) may be appointed from a panel of professional firms of chartered accountants, advocates, company secretaries, cost and works accountants or firms having a combination of these professions which the Central Government constitute for the tribunal; (b) may be a body corporate consisting of such professionals as may be approved by the Central Government from time to time. (c) may be a whole-time or part-time office, approved by the Central Government. Liquidator (Sec. 449). On a winding up order being made in respect of a company, the Official Liquidator shall, by virtue of his office, become the liquidator of the company. Style, etc. of liquidator (Sec. 452). The liquidator shall be described by the style of the Official Liquidator of the particular company in respect of which he acts, and not by his individual name. Provisional liquidator (Sec. 450). At any time after the presentation of a winding up petition and before the making of a winding up order, the Tribunal may appoint the Official Liquidator to be the liquidator provisionally. A provisional liquidator is as much a liquidator in winding up; in fact, the name provisional liquidator is only a convenient label he has the same powers and to the extent these powers imply duties, the same duties as a liquidator in a winding up. The Tribunal may limit and restrict his powers by the order appointing him or by a subsequent order. Otherwise, he has the same powers as a liquidator has. Notice to company before appointment of provisional liquidator. Before appointing a provisional liquidator, the Tribunal shall give notice to the company and give a reasonable opportunity to it to make its representation. If the Tribunal thinks fit, it may dispense with such notice; but in that case, it shall in writing record the special reasons for not giving the notice. On a winding up order being made by the Tribunal, the Official Liquidator shall cease to hold office as provisional liquidator and shall become the liquidator of the company. Duties of liquidator 1. Proceedings in winding up [Sec. 451 (1) and (3)] : The liquidator shall conduct the proceedings in winding up the company and perform duties imposed by the Tribunal. The acts of the liquidator shall be
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valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification. Acts done, after his appointment has been shown to be invalid, shall not be deemed to be validly done. 2. Report [Sec. 455 (1)] : The Official Liquidator shall as soon as practicable after receipt of the statement of affairs of the company (to the submitted under Sec. 454), and not later than 6 months from the date of the order of winding up, submit a preliminary report to the Tribunal. The report shall contain particulars(a) As to the amount of the capital issued, subscribed, and paid-up, and the estimated amount of assets and liabilities. (b) If the company has failed, as to the cause of the failure; and (c) Whether, in his opinion, further inquiry is desirable as to any matter relating to the promotion, formation, or failure of the company, or the conduct of business thereof. (2a) Additional reports. The Official Liquidator may, if he thinks fit, make further reports stating the manner in which the company was promoted or formed. He may further state if any fraud has been committed by any person in companys promotion or formation, or since the formation thereof. He may also state any other matters which it is desirable to bring to the notice of the Tribunal. If in any further report the Official Liquidator states that a fraud has been committed, the Tribunal shall have the further powers provided in Sec. 478 as to the public examination of promoters and officers. 3. Custody of companys property (Sec. 456) : Where a winding up order has been made or where a provisional liquidator has been appointed, the liquidator/provisional liquidator shall take into his custody all the property, effects and actionable claims to which the company is entitled. So long as there is no liquidator, all the property and effects of the company shall be deemed to be in the custody of the Tribunal. 4. Exercise and control of liquidators powers (Sec. 460) : (1) The liquidator shall, in the administration of the assets of the company and the distribution thereof among creditors, have regard to any directions which may be given by resolution of the creditors or contributories at any general meeting or by the committee of inspection. Any directions by the creditors or contributories at any general meeting shall override any directions given by the committee of inspection. 5. Meeting of creditors and contributories : The liquidator any summon general meetings of the creditors or contributories whenever he thinks fit for the purpose of ascertaining their wishes. He shall summon such meetings at such times as the creditors or contributories may by resolution direct, or whenever requested in writing to do so by not less than 1/10th in value of the creditors or contributories, as the case may be. 6. Directions from the Tribunal : The liquidator may apply to the Tribunal for directions in relation to any particular matter arising in winding up. He shall also use his own discretion in the administration of the assets of the company and in the distribution thereof among the creditors.
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7. Proper books (Sec. 461) : The liquidator shall keep proper books for making entries or recording minutes of the proceedings at meetings and such other matters as may be prescribed. Any creditor or contributory may, subject to the control of the Tribunal, inspect any such books personally or by his agent. 8. Audit of accounts (Sec. 462) : The liquidator shall, at such times as may be prescribed but at least twice each year during his tenure of office present to the Tribunal an account of his receipts and payments as liquidator. The account shall be in the prescribed form, shall be made in duplicate, and shall be duly verified. The Tribunal shall cause the account to be audited. For the purpose of the audit the liquidator shall furnish the Tribunal with such vouchers, information and the books as the Tribunal may require. Once copy of the audited accounts shall be filed and kept by the Tribunal. The other copy of the account shall be delivered to the Registrar for filing. Each copy shall be open to the inspection of any creditor, contributory or person interested. The liquidator shall cause the audited account or its summary to be printed. He shall send a printed copy of the account or its summary by post to every creditor and to every contributory. The Tribunal may dispense with compliance with this provision. 9. Appointed of committee of inspection (Sec. 464) : May be the Tribunal at the time of making an order for the winding up of a company or at any time thereafter, direct that there ought to be appointed a committee of inspection to act with the liquidator. 10. Pending liquidation (Sec. 551) : The liquidator shall, within 2 months of the expiry of each year from the commencement of winding up, file a statement duly audited by a qualified auditor of the company, with respect to the proceedings in, and position of, the liquidation. The statement shall be filed(a) in the case of a winding up by the Tribunal, in Tribunal; and (b) in the case of a voluntary winding up, with the Registrar. When the statement is filed in Tribunal, a copy shall simultaneously be filed with the Registrar and shall be kept by him along with the other records of the company. Powers of liquidator 1. Powers exercisable with the sanction of the Tribunal [Sec. 457 (1)]. The liquidator in a winding up by the Tribunal shall have power, with the sanction of the Tribunal,(1) To institute or defend suits and other legal proceedings, civil or criminal, in the name and on behalf of the company. (2) To carry on the business of the company so far as may be necessary for the beneficial winding up of the company. (3) To sell the immovable and movable property and its auctionable claims with power to transfer the whole or sell the same in parts. (4) To raise money on the security of the companys assets. The assets include all contributions which the liquidator is entitled to get from the members, past or present, as well as all assets which have been misappropriated as against creditors [Stringers Case, (1869) 4 Ch. App. 45].
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(5) To do all such other things as may be necessary for winding up the affairs of the company and distributing its assets. 2. Powers exercisable without the sanction of the Tribunal [Sec. 457 (2)]. The liquidator in a winding up by the Tribunal shall have power, without the sanction of the Tribunal,(1) to do all acts and to execute documents and deeds on behalf of the company under its seal; (2) to inspect the records and returns of the company or the files of the Registrar without payment of any fee; (3) to prove, rank and claim in the insolvency of any contributory for any balance against his estate and to receive dividends; (4) to draw, accept, make and endorse any bill of exchange, hundi or promissory note on behalf of the company in the course of its business; (5) to take out, in his official name, letters of administration to any deceased contributory, and to do any other act necessary for obtaining payment of any money due from a contributory or his estate; (6) to appoint an agent to do any business which he is unable to do himself. 3. Powers exercisable in case of onerous contract (Sec. 535). The term onerous means a right to property, e.g., a lease, in which the obligations attaching to it exceed the advantage to be derived from it. The liquidator may, with the leave of the Tribunal, disclaim onerous contracts, and properties. This shall be done within 12 months after the commencement of the winding up, unless the Tribunal extends time. 2.4.8. Statement of affairs (Sec. 454) Content of statement- Within 21 days of the relevant date (i.e., the date of the appointment of a provisional liquidator, or where no such appointment is made, the date of winding up order), the company shall submit a statement to the Official Liquidator as to the affairs of the company. The Tribunal may in its discretion direct that the company need not submit this statement. The statement shall be in the prescribed form, verified by affidavit and contain the following particulars: 1. The assets of the company, showing separately cash in hand and at bank and negotiable securities. 2. Its debts and liabilities. 3. Names, residences and occupations, of its creditors, stating separately the amount of secured and unsecured debts. 4. In the case of secured debts, particulars of the securities held by the creditors, their value and dates on which they were given. 5. The debts due to the company and names and the addresses of persons from whom they are due and the amount likely to be realized. 6. Such further information as may be required by the Official Liquidator. The Official Liquidator or the Tribunal may extend the period of 21 days for the submission of the statement to a maximum period of 3 months.
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Who is to submit the statement? -The statement shall be submitted and verified by one or more of the persons who are at the relevant date directors and by the person who is at that date the manager, secretary or other chief officer of the company. The Official Liquidator may also require any of the following persons to submit and verify the statement. The persons required to submit and verify the statement may be(a) present or past officers of the company; (b) persons who have taken part in the formation of the company at any time within 1 year before the relevant date; (c) present employees or employees within 1 year before the relevant date, and who are capable of giving the information required; (d) employees and officers of another company which is or was within 1 year before the relevant date, an officer of the company to which the statement relates. 2.4.9. Committee of inspection (Secs. 464 and 465) Appointment and composition of committee (Sec. 464). The Tribunal may, at the time of making an order for the winding up of a company or at any time thereafter, direct that there shall be appointed a committee of inspection to act with the liquidator. The liquidator shall then within 2 months from the date of such direction convene a meeting of the creditors of the company for the purpose of determining the membership of the committee. Within 14 days of the creditors meeting, the liquidator shall call a meeting of the contributories to consider the decision of the creditors with respect to the membership of the committee. The contributories may accept the decision of the creditors with or without modification or reject it. If the contributories do not accept the decision of the creditors, the liquidator shall apply to the Tribunal for directions as to what shall be the composition of the committee and who shall be its members. Constitution and proceedings of the committee (Sec. 465). The committee of inspection shall not have more than12 members. The members shall be creditors and contributories of the company, in such proportions as may be agreed on by the meetings of creditors and contributories. In case of difference of opinion between creditors and contributories, the proportion shall be determined by the Tribunal. The committee of inspection shall have the right to inspect the accounts of the liquidator at all reasonable times. It shall meet at appointed times. The liquidator or any member of the committee may also call its meeting as and when he thinks necessary. The quorum of its meeting shall be 1/3rd of the total number of the members or 2 whichever is higher. It may act by a majority of its members present at a meeting, but it shall not act unless a quorum is present. 2.4.10. General Powers of the tribunal To facilitate the winding up of a company of the Tribunal, the Companies Act, 1956 gives the following powers to the Tribunal. These powers are in addition to the powers conferred on the Tribunal by Sec. 433 on hearing the petition.
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1. Stay of winding up proceedings (Sec. 466) : The Tribunal may, at any time after making a winding up order on the application either of the Official Liquidator or of any creditor or contributory, stay the winding up proceedings. The Tribunal may, before making an order, require the Official Liquidator to furnish to the Tribunal, a report with respect to any facts or matters which are in his opinion relevant to the application. 2. (1) Settlement of list of contributories (Sec. 467) : The Tribunal may settle the list of contributories that are liable to contribute to the assets of the company, with the power to rectify the register of members. (2) Payment of debts due by contributory (Sec. 469) : The Tribunal may also order any contributory to pay money, due by him to the company, apart from any call. (3) Power to make calls (Sec. 470) : The Tribunal may also make calls on all or any of the contributories for payment of any money which it considers necessary to satisfy the debts and liabilities of the company, for the expenses of winding up and for adjustment of the rights of the contributories. (4) Adjustment of rights of contributories (Sec. 475) : The Tribunal shall adjust the rights of contributories among themselves and distribute any surplus among persons entitled thereto. 3. Delivery of property (Sec. 468) : The Tribunal may, at any time after making a winding up order, direct delivery to the liquidator of any money, property or books and papers in the custody or control of any contributory, trustee, receiver, banker, agent, officer or other employee of the company, to which the company is prima facie entitled. 4. Exclusion of creditors (Sec. 474) : The Tribunal may fix a time within which creditors shall prove their debts or claims. It may exclude creditors not proving within the time from the benefit of any distribution made before those debts and claims are proved. 5. Order as to costs (Sec. 476) : In case of deficiency of assets to satisfy the liabilities, the Tribunal may give priority to the payment, out of the assets, of costs, charges and expenses of the winding up proceedings. 6. Summoning of persons suspected of having property of the company (Sec. 477) : The Tribunal may, at any time after the appointment of a provisional liquidator or the making of a winding up order, summon before it any officer of the company or person known or suspected to have in his possession any property or books or papers of the company. It may also summon any person who is known or suspected to be indebted to the company. The Tribunal may also summon any person whom the Tribunal considers capable of giving information concerning the promotion, formation, trade, dealings, property, books or papers, or affairs of the company. 7. Public examination (Sec. 478) : If in the opinion of the Official Liquidator a fraud has been committed by any person in the promotion or formation of the company, or by any officer of the company in relation to the company since its formation, he shall make a report to
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the Tribunal. In such a case the Tribunal may direct that person or officer shall attend before the Tribunal and be publicly examined as to the promotion or formation or the conduct of the business of the company, or as to his conduct and dealings as an officer thereof. 8. Arrest of absconding contributory (Sec. 479) : If at any time either before or after making a winding up order, the Tribunal believes that a contributory is about to quit India or to abscond or to remove and conceal any property for the purpose of avoiding payment or avoiding examination, he may be arrested and the relevant books, papers and movable property may be seized. 9. Meeting of creditors or contributories (Sec. 557) : In all matters relating to the winding up of a company, the Tribunal may convene meetings of creditors or contributories for the purpose of ascertaining their wishes. 2.4.11. Dissolution of company (Sec. 481) Dissolution puts an end to the existence of a company. A company which has been dissolved no longer exists as a separate entity capable of holding property or of being sued in the Tribunal [Employers Liability Assurance Corpn. V. Sidgwick Collins & Co., (1927) A.C. 95]. Grounds for dissolution. The Tribunal shall make an order for the dissolution of a company(1) When the affairs of the company have been completely wound up, or (2) When the Tribunal is of opinion that the liquidator cannot proceed with the winding up for want of funds and assets, or (3) For any other reason. The Tribunal shall make an order for the dissolution of the company only when it is just and reasonable in the circumstances of the case that such an order should be made. The company shall be dissolved from the date of the order of the Tribunal. Within 30 days of the order of the Tribunal, the liquidator shall send a copy of the order to the Registrar who shall make in his books a minute of the dissolution of the company. 2.4.12. Contributory Definition of contributory (Sec. 428). The term contributory means every person liable to contribute to the assets of a company in the event of its being would up and includes the holder of any shares which are fully paid up. List of contributories. The list of contributories shall be prepared in two parts, viz., List A and List B. List A shall include the present members of the company, i.e., members whose names appear in the companys register of members at the time of the winding up of the company.
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List B shall include the past members of the company, i.e., members who ceased to be members within one year preceding the commencement of the winding up of the company. Liability of contributories (Sec. 426). In the event of a company being wound up every present and past member shall be liable to contribute to the assets of the company to an amount sufficient(a) for payment of (i) its debts and liabilities, and (ii) costs, charges and expenses of the winding up, and (b) for the adjustment of the rights of the contributories among themselves. Liability of present members: The liability of a present member (i.e., List A contributory) shall be limited(1) in the case of a company limited by shares, to the amount remaining unpaid on the shares; and (2) in the case of a company limited by guarantee, to the amount undertaken to be contributed by him to the assets of the company in the event of its being wound up. Liability of past members :(i.e. List B Contributory) shall not be liable to contribute 1) If he has ceased to be a member for 1 year or more before the commencement of the winding up; 2) in respect of any debt or liability of the company contracted after he ceased to be a member; 3) If it appears to the Tribunal that the present members will be able to satisfy the contributions required to be made by them Where there have been several transfers of the same shares within a year before the winding up, the primary liability is that of the latest transferor in case of default by the A List contributories [Humbys case, (1872) 426 L.T. 936] Ex-contractu and ex-lege liability Under Sec. 429, the liability of a member to be included in the list of contributories is not ex-contractu, i.e. it does not arise as a result of the contract of membership. His liability is ex-lege which means that it arises by reason of the fact that his name appears in the register of members even though the allotment to him was void or that he had sold his shares to a purchaser who has not got his name registered in the register. In the absence of rectification of the register, his liability is absolute under Sec. 429. Before a company goes into liquidation, the liability of a member to contribute is measured by the contractual obligation arising from membership. But after liquidation Sec. 429 imposes a new liability on the shareholders in respect of unpaid calls made before or after the winding up. Such calls can be recovered even if they are barred by limitation before the order of winding up was made. Voluntary winding up (Secs. 484 to 520) Voluntary winding up means winding up by the members or creditors of a company without interference by the Tribunal. The object of a voluntary
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winding up is that the company, i.e. the members as well as the creditors are left free to settle affairs without going to the Tribunal. They may however apply to the tribunal for any directions if and when necessary. Circumstances in which a company may be wound up voluntarily (sec. 484)- A company may be wound up voluntarily 1) By passing an ordinary resolution: When the period, if any, fixed for the duration of a company by the Articles has expired, the company in general meeting may pass an ordinary resolution for its voluntary winding up. The company may also do so when the event, if any, on the occurrence of which the Articles provide that the company is to be dissolved, has occurred. 2) By passing a special resolution- A company may at any time pass a special resolution that it be wound up voluntarily. No reasons need be given where the members pass a special resolution for the voluntary winding up of the company. Even the Articles cannot prevent the exercise of this statutory right. Commencement of voluntary winding up (Sec. 486)- A voluntary winding up shall be deemed to commence at the time when the resolution (ordinary or special, as the case may be) for its voluntary winding up is passed. Advertisement of resolution.(Sec. 485)- Within 14 days of the passing of the resolution for voluntary winding up of the company, the company shall give notice of the resolution by advertisement in the Official Gazette, and also in some newspaper circulating in the district of the registered office of the company. Types of voluntary winding up A voluntary winding up may be a 1. members voluntary winding up, or 2. creditors voluntary winding up. 1. Members voluntary winding up Declaration of solvency (Sec. 488).In a voluntary winding up of a company if a declaration of its solvency is made in accordance with the provisions of Sec.488, it is a members voluntary winding up. The declaration shall be made by a majority of the directors at a meeting of the Board that the company has no debts or that it will be able to pay its debts in full within 3 years from the commencement of the winding up. The declaration shall be verified by an affidavit. The declaration shall have effect only when it is a) made within five weeks immediately before the date of the resolution, and delivered to the Registrar for registration before that date; and b) accompanied by a copy of the report of the auditors of the company on (i) the profit and loss account of the company from the date of the last profit and loss account to the latest practicable date immediately
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before the declaration of solvency. ii) the balance sheet of the company and iii) a statement of the companys assets and liabilities as on the last mentioned date. A winding up in the case of which a declaration has been made and delivered is referred to as a members voluntary winding up, and a winding up in the case of which a declaration has not been so made and delivered is referred to as a creditors voluntary winding up. Provisions applicable to a members voluntary winding up Secs. 490 to 498 shall apply in relation to a members voluntary winding up (Sec. 489). The provisions of these Sections are as follows: 1. Appointment and remuneration of liquidators (Sec. 490) : The company in general meeting shall appoint one or more liquidators for the purpose of winding up its affairs and distributing the assets. It shall also fix the remuneration, if any, to be paid to the liquidator or liquidators. Any remuneration so fixed shall not be increased in any circumstances. The liquidator shall not take charge of his office before his remuneration is fixed as aforesaid. 2. Boards powers to cease on appointment of a liquidator (sec. 491) : On the appointment of a liquidator, all the powers of the Board of directors, the managing or whole-time directors, and manager, shall cease except when the company in general meeting or the liquidator may sanction them to continue. 3. Power to fill vacancy in office of liquidator (sec. 492) : If a vacancy occurs by death, resignation or otherwise in the office of any liquidator appointed by the company, the company in general meeting may fill the vacancy. For this purpose a general meeting may be convened by any contributory or by the continuing liquidator or liquidators, if any. 4. Notice of appointment of liquidator to be given to Registrar (Sec.493) : The company shall give notice to the Registrar of the appointment of a liquidator or liquidators. It shall also give notice of every vacancy occurring in the office of liquidator and of the names of the liquidators appointed to fill every such vacancy. The notice shall be given by the company within 10 days of the event to which it relates. 5. Power of liquidator to accept shares, etc. as the consideration for sale of property (Sec. 494). 6. Duty of liquidator to call creditors meeting in case of insolvency (Sec.495) : If the liquidator is at any time of opinion that the company will not be able to pay its debts in full within the period stated in the declaration, he shall forthwith summon a meeting of the creditors. He shall lay before the meeting a statement of the assets and liabilities of the company. Thereafter the winding up shall become creditors voluntary winding up. 7. Duty to call general meeting at the end of each year (Sec. 496) : In the event of the winding up continuing for more than 1 year, the
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liquidator shall call a general meeting of the company at the end of the first year from the commencement of the winding up. Likewise, he shall call a general meeting at the end of each succeeding year. He shall lay before the meeting an account of his acts and dealings and of the conduct of the winding up during the year. 8. Final meeting and dissolution (Sec. 497) : As soon as the affairs of the company are fully wound up, the liquidator shall make up an account of the winding up, showing how the winding up has been conducted and how the property of the company has been disposed of. He shall then call a general meeting of the company and lay before it the accounts showing how the winding up has been conducted. The meeting shall be called by advertisement a) specifying the time, place and object of the meeting; and b) published not less than one month before the meeting in Official Gazette, and also in some newspaper circulating in the district the registered office of the company. Within one week after the meeting, the liquidator shall sent to the Registrar and the Official Liquidator a copy each of the account and shall make a return to each of them of the holding of the meeting and of the late thereof. If a quorum is not present at the final meeting, the liquidator shall make a return that the meeting was duly called but could not be held for want of quorum. The Registrar on receiving the account and return shall register them. The Official Liquidator, on receiving them, shall make a scrutiny, the books and papers of the company. The liquidator of the company present officers shall give the Official Liquidator all reasonable facilities to make the scrutiny. On such scrutiny the Official Liquidator shall make a report to the Tribunal. If the report shows that the affairs of the company have been conducted in a manner not prejudicial to the interests of its members or to public interest, then from the date of the submission of the report to the Tribunal, the company shall be deemed to be dissolved. 9. Provisions as to annual and final meeting in case of insolvency (Sec.498) If in the case of a members voluntary winding up, liquidator finds that the company is insolvent, Secs. 508 and 509 (what deal with the duty of the liquidator to call a meeting of the company of creditors at the end of each year (Sec. 508) and final meeting and dissolution (Sec.509) in case of a creditors voluntary winding up] shall apply as if the winding up were a creditors voluntary winding up and a members voluntary winding up. It should be noted that in such a case Secs. 508 and 509 shall apply to the exclusion of Secs. 496 and 497. 2. Creditors voluntary winding up A voluntary winding up of a company in which a declaration of solvency is not made is referred to as a creditors voluntary winding up.
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Provisions applicable to creditors voluntary winding up Secs. 500 to 509 shall apply in relation to a creditors voluntary winding up (Sec.499). The provisions of these Sections are as follows: 1. Meeting of creditors (Sec. 500) : The company shall call a meeting of the creditors of the company on the day on which there is to be held the general meeting of the company at which the resolution for voluntary winding up is to be proposed, or on the next day. It shall send notices of the meeting to the creditors by post simultaneously with the sending of the notices of meeting of the company. It shall also cause notice of the meeting of the creditors to be advertised once at least in the Official Gazette and once at least in 2 newspapers circulating in the district of the registered office of the company. The Board of directors of the company shall cause a full statement of the position of the companys affairs together with a list of the creditors and the estimated amount of their claims to be laid before the meeting. It shall also appoint one of their members to preside at this meeting. It shall be the duty of the director so appointed to attend the meeting and beside thereat. 2. Notice of resolution to be given to Registrar (Sec. 501) : Notice of any resolution passed at a creditors meeting shall be given by the company the Registrar within 10 days of the passing thereof. 3. Appointment of liquidator (Sec. 502) : The creditors and the members at their respective meeting may nominate a liquidator. If they nominate different persons, the creditors nominee shall be the liquidator. But any director, member or creditor of the company may apply to the Tribunal for an order that the person nominated as liquidator by the company or any other Tribunal within 7 days after the nomination, on which the nomination was made by the creditors. If no person is nominated by the creditors, the person nominated by the members shall be the liquidator. Likewise, if no person is nominated by the company, the person nominated by the creditors shall be the liquidator. 4. Appointment of committee of inspection (Sec. 503) : The creditors at their meeting may, if they think fit, appoint a committee of inspection consisting of not more than 5 persons. If such a committee is appointed, the company may also at a general meeting appoint not more than 5 members to the committee. However, the creditors may, if they think fit, dissolve that all or any of the persons appointed by the company ought to be members of the committee of inspection. If the creditors and members do not agree on a common list, the Tribunal may constitute a committee of inspection. 5. Liquidators remuneration (Sec.504) : The committee of inspection, if there is no such committee, the creditors, may fix the remuneration of the liquidator. Where the remuneration is not so fixed, it shall be determined by the Tribunal. The remuneration shall not be increased in any circumstances.
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6) Boards powers to c ease on appointment of liquidator (Sec.505) : On the appointment of a liquidator, all the powers of the Board of directors shall cease. But the committee of inspection, or if there is no such committee, the creditors in general meeting, may sanction the continuance of the Board. 7) Power to fill vacancy in office of liquidator (Sec.506) : If a vacancy occurs by death, resignation or otherwise, in the office of a liquidator (other than a liquidator appointed by, or by the direction of, the Tribunal), the creditors in general meeting may fill the vacancy. 8) Power of liquidator to accept shares, etc., as consideration for sale of property (Sec. 507) : The provisions of Sec. 494 shall apply in the case of a creditors voluntary wounding up. However the powers of the liquidator under Sec. 494 shall not be exercised except with the sanction either of the Tribunal or of the committee of inspection. 9) Duty of liquidator to call meeting at the end of each year (Sec.508) : The liquidator shall call a general meeting of the company and a meeting of the creditors every year, within 3 months from the close of every year. This will be so if the winding up continues for more than 1 year. He shall lie before the meeting an account of his acts and dealings and of the conduct of winding up during the preceding year and position of the winding up. 10) Final meeting and dissolution (Sec. 509) : As soon as the affairs of the company are fully wound up, the liquidator shall make up an account of the winding up showing how the winding up has been conducted and how the property of the company has been disposed. He shall then call a general meeting of the company and a meeting of the creditors for the purpose of laying the account before the meeting and giving explanation thereof. Thereafter the procedure shall be the same and laid down in Sec.497. Members and creditors voluntary winding up compared 1. Declaration of solvency : In case of a member voluntary winding up, there is declaration of solvency. In case of a creditors voluntary winding up, there is no such declaration. 2. Control of winding up : In a members voluntary winding up, members control the winding up of the company and the creditors do participate directly as the company makes a declaration of solvency. In creditors voluntary winding up, the creditors control the winding up the company as the company is deemed to be insolvent. 3. Meetings : In a members voluntary winding up, there is no meeting of creditors. In a creditors voluntary winding up, whenever there is meeting of contributories, there is a corresponding meeting of creditors. 4. Appointment of liquidator : In a members voluntary winding up, liquidator is appointed by the company and his remuneration is fixed by the company. In a creditors voluntary winding up, he is appointed by the creditors and his remuneration is fixed by the committee inspection or, if there is no such committee, by the creditors.
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5. Committee of inspection : There is no committee of inspection members voluntary winding up; in a creditors voluntary winding up creditors may appoint a committee of inspection. 6. Powers of liquidator : In a members voluntary winding up, liquidator can exercise certain powers with the sanction of a special resolution of the company; in a creditors voluntary winding up, he do so with the sanction of the Tribunal or the committee of inspection of a meeting of the creditors. 2.5 Corporate governance A Corporation is a mechanism established to allow different parties to contribute capital, expertise, and labour for their mutual benefit. The investor/shareholder participates in the profits of the enterprise without taking responsibility for the operations. Management runs the company without being responsible for personally providing the funds. To make this possible, laws have been passed so that shareholders have limited liability and, correspondingly, limited involvement in a corporations activities. That involvement does include, however, the right to elect directors who have a legal duty to represent the shareholders and protect their interests. As representatives of the shareholders, directors have both the authority and the responsibility to establish basic corporate policies and to ensure that they are followed. The board of directors has, therefore, an obligation to approve all decisions that might affect the long-run performance of the corporation. This means that the corporation is fundamentally governed by the board of directors overseeing top management, with the concurrence of the shareholders. The term corporate governance refers to the relationship among these three groups in determining the direction and performance of the corporation. Over the past decade, shareholders and various interest groups have seriously questioned the role of the board of directors in corporation. They are concerned that inside board members may use their position to feather their own nest and that outside board members often lack sufficient knowledge, involvement, and enthusiasm to do an adequate job of monitoring and providing guidance to top management, Instances of widespread corruption and questionable accounting practices at Enron, Global Crossing, WorldCom, Tyco, and Qwest, among others, seem to justify their concerns. Tycos board, for example, seemed more interested in keeping CEO Kozlowski happy than in safeguarding shareholder interests. They very passivity of the board (in addition to questionable financial dealings) was one reason the Kozlowski era directors were forced to resign in 2003. The general public has not only become more aware and more critical of many boards apparent lack of responsibility for corporate activities, it has begun to push government to demand accountability. As a result, the board as a rubber stamp of the CEO or as a bastion of the old boy selection system is being replaced by more active, more professional boards.
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Responsibilities of the board Laws and standards defining the responsibilities of boards of directors vary from country to country. For example, board members in Ontario, Canada, face more than 100 provincial and federal laws governing director liability. The United States, however, has no clear national standards or federal laws. Specific requirements of directors vary, depending on the state in which the corporate charter is issued. There is, nevertheless, a developing worldwide consensus concerning the major responsibilities of a board. Interviews with 200 directors from eight countries (Canada, France, Germany, Finland, Switzerland, The Netherlands, the United Kingdom, and Venezuela) revealed strong agreement on the following five boards of directors responsibilities, listed in order of importance. 1. 2. 3. 4. 5. Setting corporate strategy, overall direction, mission, or vision Hiring and firing the CEO and top management Controlling, monitoring, or supervising top management Reviewing and approving the use of resources Caring for shareholder interests
Directors in the United States must make certain, in addition to the duties just listed, that the corporation is managed in accordance with the laws of the state in which it is incorporated. They must also ensure managements adherence to laws and regulation, such as those dealing with the issuance of securities, insider trading, and other conflict ofinterest situations. They must also be aware of the needs and demands of constituent groups so that they can achieve a judicious balance among the interests of these diverse groups while ensuring the continued functioning of the corporation. In a legal sense, the board is required to direct the affairs of the corporation but not to manage them. It is charged by law to act with due care. If a director or the board as a whole fails to act with due care and, as a result, the corporation is in some way harmed, the careless director or directors can be held personally liable for the harm done. This is no small concern, given that one survey of outside directors revealed that more than 40% had been named as part of lawsuits against the corporations. Role of the Board in Company Management How does a board of directors fulfill these many responsibilities? The role of the board of directors in strategic management is to carry out three basic tasks: Monitor: By acting through its committees, a board can keep abreast of developments inside and outside the corporation, bringing to managements attention developments it might have overlooked. A board should at least carry out this task. Evaluate and influence: A board can examine managements proposals, decisions, and actions; agree or disagree with them; give advice and offer
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suggestions, and outline alternatives. Active boards perform this task in addition to the monitoring one. Initiate and determine: A board can delineate a corporations mission and specify strategic options to its management. Only the most active boards take on this task in addition to the two previous ones. Board of Directors Continuum A board of directors is involved in strategic management to the extent that it carries out the three tasks of monitoring, evaluating and influencing, and initiating and determining. The board of directors continuum shown in Figure 2-1 shows the possible degree of involvement (from law to high) in the strategic management process. At types, boards can range from phantom boards with no real involvement to catalyst boards with very high degrees of involvement. Research suggests that active board involvement in strategic management is positively related to corporate financial performance. Highly involved boards tend to be very active. They take their tasks of monitoring, evaluating, and influencing, plus initiating and determining, very seriously; they provide advice when necessary and keep management alert. Their heavy involvement in the strategic management process places them in the active participation or even catalyst positions. For example, in a survey of directors of large U.S. corporations conducted by Korn / Ferry International, more than 60^ indicated that they were deeply involved in the strategy-setting process. In the same survey, 54% of the respondents indicated that their boards participate in annual retreats or special planning sessions to discuss company strategy. Nevertheless, only slightly more than 32% of the boards help develop the strategy. More than two-thirds of the boards review strategy only after it has been first developed by management. Another 1% admits playing no role at all in strategy. These and other studies suggest that most large publicly owned corporations have boards that operate at some point between nominal. DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT Low (Passive)
Phantom Rubber Stamp Never knows what to do, if anything; no degree of involvement. Permits officers to make all decisions. Minimal Review Formally reviews selected issues that officers bring to its attention Nominal
High (Active)
Active Catalyst Participation Participation Involved to a limited Approves, questions, Takes the leading role in establishing and modifying the mission, objectives,
degree in the and makes performance or review of selected key decisions, indicators, final decisions on mission, strategy, policies, and
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Low (Passive)
or programs of
High (Active)
objectives, Has active strategy, and policies. It has a very active strategy committee,
management board committees. Performs fiscal and management adults.
Co-determination: Should Employees Serve on Boards? Co-determination, the inclusion of a corporations workers on its board, began only recently in the United States. Corporations such as Chrysler, Northwest Airlines, United Airlines (UAL), and Wheeling Pittsburgh Steel have added representatives from employee associations to their boards as part of union agreements or employee stock ownership plans (ESOPs). For example, UAL workers traded 15% in pay cuts for 55% of the company (through an ESOP) and 3 of the firms 12 board seats. In this instance, workers represent themselves on the board not so much as employees, but primarily as owners. At Chrysler, however, the United Auto Workers union obtained a temporary seat on the board as part of a union contract agreement in exchange for changes in work rules and reductions in benefits. In situation like this, when director represents an internal stakeholder, critics raise the issue of conflict of interest. Can a member of the board, who is privy to confidential managerial information, function, for example, as union leader whose primary duty is to fight for the best benefits for his or her members? Although the movement to place employees on the boards of directors of U.S., companies shows little likelihood of increasing (except through employee stock ownership), the European experience reveals an increasing acceptance of worker participation (without ownership) on corporate boards. Germany pioneered co-determination during the 1960s, with a two-tiered system: a supervisory board elected by shareholders and employees to approve or decide corporate strategy and a policy and management board (composed primarily of top management) appointed by the supervisory board to manage the companys activities. Most other Western European countries have either passed similar co-determination legislation (for example, Sweden, Denmark, Norway, Austria) or use worker councils to work closely with management (for example, Belgium, Luxembourg, France, Italy, Ireland, and the Netherlands) Interlocking Directorates CEOs often nominate chief executives (as well as board members) from other firms to membership on their own boards in order to create an
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Interlocking directorate. A direct interlocking directorate occurs when two firms share a director or when an executive of one firm sits on the board of a second firm. An indirect interlock occurs when two corporations have directors who also serve on the board of third firm, such as a bank. Both inside and outside directors at the largest U.S. companies serve three boards. Although the Clayton Act and the Banking Act of 1933 prohibit interlocking directorates by U.S. companies competing in the same industry, interlocking continues to occur in almost all corporations, especially large ones. Interlocking occurs because large firms have a large impact on other corporations these other corporations, in turn, have some control over the firms inputs and marketplace. For example, most large corporations in the United States, Japan, and Germany are interlocked either directly or indirectly with financial institutions. Interlocking directorates are also a useful method for gaining both inside information about an uncertain environment and objective expertise about potential strategies and tactics. For example, Kleiner Perkins, the high-tech venture capital firm, not only has seats on the boards of the companies in which it invests, but it also have executives (whom Kleiner Perkins hired) from one entrepreneurial venture serve as directors on others. Kleiner Perkins refers to it network of interlocked firms as its keiretsu. Family owned corporations, however, are less likely to have interlocking directorates than are corporations with highly dispersed stock ownership, probably because family owned corporations do not like to dilute their corporate control by adding outsiders to board room discussions. Nevertheless, some evidence indicates that well interlocked corporations are better able than others to survive in a highly competitive environment. Nomination and election of board members Traditionally the CEO of a corporation decided whom to invite to board membership and merely asked the shareholders for approval in the annual proxy statement. All nominees were usually elected. There are some dangers, however, in allowing the CEO free rein in nominating directors. The CEO might select only board members who, in the CEOs opinion, will not disturb the companys policies and functioning. Given that the average length of service of a U.S board member is for five 4 year terms, CEO friendly, passive board are likely to result. This is especially likely given that 92% of surveyed directors indicate that their company did not have term limits for board members. Directors selected by the CEO often feel that they should go along with any proposal the CEO makes. Thus board members find themselves accountable to the very management they are charged to oversee. Because this is likely to happen, more boards are using a nominating committee to nominate new outside board members for the shareholders to elect. Approximately 74% of large U.S., corporations now uses nominating committees to identify potential directors. Virtually every corporation whose directors serve terms of more than one year divides the board into classes and staggers elections so that
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only a portion of the board stands for election each year. This is called a staggered board. Arguments in favour of this practice are that it provides continuity by reducing the chance of an abrupt turnover in its membership and that it reduces the likelihood of electing people who are unfriendly to management (who might be interested in a hostile takeover) through cumulative voting. An argument against staggered boards is that they make it more difficult for concerned shareholders to curb a CEOs power, especially when that CEO is also Chairman of the Board. For example, out of dissatisfaction with the companys poor performance and their perception that the board was inactive, two unions supported a shareholder proposal in 1996 to cancel Kmarts staggered board so that the entire board would be elected annually. A survey of directors of U.S. corporations revealed the following criteria for selecting a good director:

is willing to challenge management when necessary (85%) has special expertise important to the company (67%) Is available outside meetings to advise management (57%) Has expertise on global business issues (41%) Understands firms key technologies and processes (39%) Brings external contacts that are potentially valuable to the firm (33%) has detailed knowledge of the firms industry (31%) Is highly visible in his or her field (31%) Is accomplished at representing the firm to stakeholders (18%) 23
Organisation of the board The size of a board in the United States is determined by the corporations charter and its bylaws, in compliance with state laws. Although some states require a minimum number of board members, most corporations have quite a bit of discretion in determining board size. The average large, publicly held from has around 11 directors. The average small / medium-size privately held company has approximately seven to eight members. Sixty seven percent of the top executives of large U.S. publicly held corporations hold the dual designation of Chairman and CEO. The percentage of firms having the Chair/CEO position combined in Canada and the United Kingdom is 43% and 20%, respectively.) The combined Chair/CEO position is being increasingly criticized because of the potential for conflict of interest. The CEO is supposed to concentrate on strategy, planning, external relations, and responsibility to the board. The Chairmans responsibility is to ensure that the board and its committees perform their functions as stated in the boards charter. Further, the Chairman schedules board meetings and presides over the annual shareholders meeting. Critics of combining the two offices in one person ask how the board can properly oversee top management if the Chairman is also top management. For this reason, the Chairman and CEO roles are separated by law in Germany, The Netherlands, and Finland. A similar law has been considered in Britain and Australia. Although research does
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not clearly indicate either a definite positive or negative effect of combined positions on corporate performance, the stock market does respond negatively to announcements of CEOs also assuming the Chairman position. Many of those who prefer that the Chairman and CEO positions be combined agree that outside directors should elect a lead director. This person would be consulted by the Chair/CEO regarding board affairs and would co-ordinate the annual evaluation of the CEO. The lead director position is very popular in the United Kingdom, where it originated. Of those U.S. companies combining the Chair and CEO positions, 30% currently have lead directors. This is one way to give the board more power without undermining the power of the Chair/CEO. The most effective boards accomplish much of their work through committees. Although they do not usually have legal duties, most committees are granted full power to act with the authority of the board between board meetings to attend to matters that must be settled quickly. This committee acts as an extension of the board and, consequently, may have almost unrestricted authority in certain areas. The audit, compensation, and nominating committees are usually composed only of outside directors. Trends in corporate governance The role of the board of directors in the strategic management of the corporation is likely to be more active in the future. Although neither the composition of boards nor the board leadership structure has been consistently linked to firm financial performance, a McKinsey survey reveals that investors are willing to pay 16% more for a corporations stock if it is known to have good corporate governance. The investors explained that they would pay more because, in their opinion, (1) good governance leads to better performance over time, (2) good governance reduces the risk of the company getting into trouble, and (3) governance is a major strategic issue. Some of todays trends in governance (particularly prevalent in the United States and the United Kingdom) that are likely to continue include the following. Boards are getting more involved not only in reviewing and evaluating company strategy but also in shaping it. Institutional investors, such as pension funds, mutual funds, and insurance companies, are becoming active on boards and are putting increasing pressure on top management to improve corporate performance. For example, the California Public Employees Retirement System (CalPERS), the largest pension system in the United States, annually publishes a list of poorly performing companies, hoping to embarrass management into taking remedial action.
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Shareholders are demanding that directors and top managers own more than token amounts of stock in the corporation. Stock is increasingly being used as part of a directors compensation. Nonaffiliated outside (non-management) directors are increasing their numbers and power in publicly held corporations as CEOs loosen their grips on boards. Outside members are taking charge of annual CEO evaluations. Boards are getting smaller, partially because of the reduction in the number of insiders but also because boards desire new directors to have specialized knowledge and expertise instead of general experience. Boards continue to take more control of board functions by either splitting the combined Chair/CEO position into two separate positions or establishing a lead outside director position. As corporations become more global, they are increasingly looking for international experience in their board members. Society, in the form of special interest groups, increasingly expects boards of directors to balance the economic goal of profitability with the social needs of society. Issues dealing with workforce diversity and the environment are now reaching the board level. For example, the board of Chase Manhattan Corporation recently questioned top management about its efforts to improve the sparse number of women and minorities in senior management. Corporate Governance: The Role of Top Management The top management function is usually conducted by the CEO of the corporation in coordination with the COO or President, Executive Vice President, and Vice Presidents of divisions and functional areas. Even though strategic management involves everyone in the organization, the board of directors top management primarily responsible for the strategic management of the firm. Responsibility of top management Top management responsibilities, especially those of the CEO, involve getting things accomplished through and with others in order to meet the corporate objectives. Top managements job is thus multidimensional and is oriented toward the welfare of the total organization. Specific top management tasks vary from firm to firm and are developed from an analysis of the mission, objectives, strategies, and key activities of the corporation. Tasks are typically divided among the members of the top management team. A diversity of skills can thus be very important. Research indicates that top management teams with a diversity of functional and educational backgrounds and length of time with the company tend to be significantly related to improvements in corporate market share and profitability. Nevertheless, the CEO, with the support of the rest of the top management team, must successfully handle two primary
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responsibilities that are crucial to the effective strategic management of the corporation: (1) provide executive leadership and a strategic vision and (2) manage the strategic planning process. Have you under stood Questions? Objective questions : 1. A contract between ABC.Ltd and B, one of its directors, is referred to a general meeting for its approval. At the meeting to a general meeting for its approval. At the meeting, B voted for the resolution and all others against it. But as B held majority of shares and was entitled to majority of votes, the resolution was passed. Is the contract binding on the company? 2. A public limited company has 15 directors, 4 of whom are not subject to retire by rotation. Is it a validly constituted Board? 3. The secretary of a company purchased some stationery for the company but he took it home and put it to his private use. The company refused to pay to the supplier of the stationery on the plea that it never received the stationery. Is the company liable? 4. At meeting of a company, only 15 shareholders were present. 9 voted for a special resolution and 2 against and 4 did not vote at all. No poll was demanded and the chairman declared the resolution to be carried. In this a valid resolution? 5. The Articles of Association of a company require the instrument appointing a proxy to be received by the company 75 hours before the meeting. Is it a valid requirement? 6. Rajesh applied for 100 shares in a company in a fictitious name. The shares were allotted in the fictitious name. Did he incur any liability under the Companies Act, 1956? 7. An allottee of share in a company brought action a director in respect of false statements in a prospectus. The director contented that the statements were prepared by the promoters and he ha relied on them. Is the director liable under the circumstances? 8. A company, in ignorance of the fact it had been struck off the Register, borrowed money on the security of a charge on its property. On an application by the company, the Tribunal restored it to the Register. Is the charge valid? 9. The Articles of Association of a company require the instrument appointing a proxy to be received by the company by the company 75 hours before the meeting. Is it a valid requirement? 10. A, an allottee of shares in a company, came to know of the misrepresentations in the prospectus on the basis of which he had applied for shares. But he did not care to take any action for 5 months after coming to know of the misrepresentations. Can he be precluded from obtaining relief? Answers 1. No 2. Yes 3. Yes 4. Yes 5. No 6. Yes 10. Yes
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Short Questions : a. b. c. d. e. f. g. h. i. j. k. What is a Private Company? What is a Public Company? What is meant by: Company limited by shares? What is meant by Company limited by Guarantee? What is an Unlimited Company? Define a Government Company. Define a foreign Company Define a holding and Subsidiary Company What is an illegal association? What are its Consequences? How are directors appointed by a company? What do you understand by winding up of company? What are the different modes of winding up? l. 2. a) b) c) 3. 4. 5. 6. 7. 8. 9. 10. Summary Company legislation in India owes origin to the English Company Law. The amendment to Companies Acts passed in India has been following the English Companies Act with certain modifications to suit Indian conditions. The first legislative enactment for Registration of Joint Stock Companies was passed in the year 1850. This Act was based on the English Companies Act, 1844 (Known as the Joint Stock Companies
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Extended Questions : How can a private company be converted into a public company? Comment on the following: The law not only recognizes a private company but also perform its benedictions on the same A limited company can be formed without the word limited as the last word of its name A subsidiary company can be the member of its holding company. Briefly describe the documents to be filed with the Registrar of Companies prior to incorporation. Who is a promoter? Discuss his legal position in relation to a company which he promotes. What is Memorandum of Association? What are its contents? When and how may it be altered? Discuss the relationship between the Art icles and the Memorandum of Association of a company. What is a prospectus? What are its contents? Is it obligatory for a company to file prospectus or a statement in lieu of prospectus with the Registrar of Companies? Briefly state the provisions of the Companies Act.1956, regarding the mode of appointment of the directors of a company. State how the managing director of a public limited company is appointed and what his duties are? What do you understand by winding up of a company? What are the different modes of winding up?
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Act of 1844) which recognized the company as a distinct legal entity, but did not grant to it the privilege of limited liability. Any 7 or more persons could form themselves into an incorporated company, with or without limited liability, by signing a Memorandum of Association and complying with the requirements of the Act. Following the English Companies Act of 1856, the Joint Stock Companies Act of 1857 was passed in India. This Act recognized, for the first time in India, the principle of limited liability. Promotion is the first stage in the formation of a company. Promotion involves identification of a business opportunity or idea, analysis of its prospects and taking steps to implement it through the formation of a Company. The directors are the brain of a company. They occupy a pivotal position in the structure of the company. They are in fact the mainspring of the company. Winding up or liquidation of a company represents the last stage in its life. It means a proceeding by which a company is dissolved. The assets of the company are disposed of, the debts are paid off out of the realized assets (or from contributions from its members), and the surplus, if any, is then distributed among the members in proportion to their holdings in the company. The two terms winding up and liquidation are used inter changeably.
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UNIT III
INDUSTRIAL LAW
3.1. Factoriess Act; 1948 3.1.1 Introduction of the Factories Act, 1948 The first Factories Act in India was passed in 1881. It was designed primarily to protect children and provide for some health and safety measures. It was followed by a new Act of 1934 passed to implement the recommendations of the Royal Commission on Labour in India and the conventions of the International Labour Organisation. The experience of the working of this Act revealed a number of defects and weaknesses, which hampered effective administration of the Act. Further, the provisions of this Act regarding safety, health and welfare of workers were also found to be inadequate and unsatisfactory. It was therefore felt that in view of the large and growing industrial activities in the country a radical overhauling of the law relating to factories was necessary. Hence the Factories Act, 1948 came into force on the 1st day of April 1949. Its object is to regulate the conditions of work in manufacturing establishments, which come within the definition of the term factory as used in the Act. The Act extends to the whole of India including the State of Jammu and Kashmir. Unless otherwise provided, it also applies to factories belonging to the Central or any State Government (Sec. 116). The Act was substantially amended in 1987. Some provisions of the Amending Act came into force with effect from 1st December, 1987 and others from 1st June, 1988. 3.1.2 Learning Objectives After studying this unit you should be able to:

Understand the definition of factory. Determine the formalities of approval, licensing and registration of factories.
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Explore the duties and power of the Inspecting staff Know the provisions of Health, Safety and Welfare Study the different schedule of Working Hours Know special provisions of child workers and women. The provisions relating to Annual Leave with Wages Know the penalties
3.1.3 What is a factory? According to Sec.2 (m), factory means any premises including the precincts thereof: (i) Wherein 10 or more workers are working or were working on any day of the preceeding 12 months, and in any part of which a manufacturing process is being carried on with the aid of power, or is ordinarily so carried on, or (ii) Wherein 20 or more workers are working or were working on any day of preceeding 12 months, and in any part of which a manufacturing process is being carried on without the aid of power, or is ordinarily so carried on. The term factory does not include a mine, subject to the operation of the Indian Mines Act, 1952 or a mobile unit belonging to the armed forces of the Union, a railway running shed or a hotel, restaurant or eating place. In simple words, a factory is a premise wherein 10 or more persons are engaged if power is used, or 20 or more persons are engaged if power is not used, in a manufacturing process. For computing the number of workers, all the workers in different groups and relays in a day shall be taken into account [Expl. 1 to Sec.2 (m)]. For the purposes of Sec. 2 (m), the mere fact that an Electronic Data Processing Unit or a Computer Unit is installed in any premises or part thereof, shall not be construed to make it a factory if no manufacturing process is being carried on in such premises or part thereof [Expl. 2 to Sec.2 (m) as introduced by the Amendment Act of 1987]. Meaning of precincts. The definition of the term factory in Sec.2 (m) envisages premises which have precincts, as the expression used in the definition is premises including the precincts thereof. Precincts are usually understood as a space enclosed by walls or fences. Where premises are buildings, they would include precincts. What are the precincts of particular premises is a question of fact to be determined according to the circumstances of each particular case. The word premises is not to be confined in its meaning to buildings alone. Example- A security fence enclosed a concrete apron of an airfield adjoining a hangar used for testing planes. Held, the airfield fell within the meaning of the precincts of factory [Wells v. Weather Ground Mech. Co. Ltd. (1951) All E.R. 588]. Whether any establishment is a factory? In order to determine whether any establishment is a factory, two things must be proved:
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(1) that a manufacturing process is being carried on in any part of the premises of that establishment; and (2) that there are prescribed number of workers working in any part of the premises where the manufacturing process is being carried on. Mere fact that power is used in premises is not the deciding factor: the power used must be in the aid of the manufacturing process [New Taj Mahal Hotel v. Inspector of Factories, (1956) 1 L.L.J. 273]. The following have been held to be factories: (a) Salt works which consist merely of open stretches of large areas of land with some temporary shelters [Ardeshir A. Bhiwandiwala v.State of Bombay, A.I.R. (1962) S.C. 29]. (b) Railway workshops [Inda Singh v. Secretary of State, A.I.R.(1929) Lah.573]. (c) A premises where manufacturing process is carried on with 7 persons employed permanently and 3 persons employed temporarily in repairs of part of machinery [Hari Krishnan & Another v. State, A.I.R., (19590 All.1974] For proper understanding of the meaning of the term factory, the following three terms should be clearly understood. 1. Manufacturing process [Sec.2 (k)]. It means any process for: (i) making, altering, repairing, ornamenting, finishing, packing, oiling, washing, cleaning, breaking up, demolishing, or otherwise treating or adapting any article or substance with a view to its use, sale, transport, delivery or disposal, or (ii) pumping oil, water, sewage, or any other substance, or (iii) generating, transforming or transmitting power, or (iv) composing types for printing, printing by letter press, lithography, photogravure or other similar process or book binding, or (v) constructing, reconstructing, repairing, refitting, finishing, breaking up ships or vessels, or (vi) preserving or storing any article in cold storage. Some of the processes which have been held to be manufacturing processes are as follows: (a) Bidi making [Chintaman Rao v. State of M.P., (1962) S.C.J. 388] (b) Moulding and transformation of raw cinematography films into a finished product [Gemini Studio v. State, (1952-53) 4 F.J.R. 329]. (c) Work done in a salt work which consists of converting sea-water into salt [Ardeshir H. Bhiwandiwala v. State of Bombay, A.I.R. (1962) S.C.29]. (d) Use of refrigerator for treating or adapting any article with a view to its sale [New Taj Mahal Caf Ltd. v. Inspector of Factories, (1956) 1 L.I.J. 273]. (e) Work of composition in printing business [V.K. Press v. Authority, A.I.R. (1955) All.702].
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(f) Use of electric motor for the purpose of lifting or pumping water [Syed Moosa Kazimi v. K.M. Sheriff, A.I.R. (1959) Mad. 542] (g) Processing of moistening, stripping and packing of tobacco leaves [V.P. Gopala Rao v. Public Prosecutor, A.I.R. (1970) S.C. 66]. (h) Activities of a petrol pump [Gateway Auto Services v. Regional Director, E.S.I. Corpn., (1981) Lab. I.C. 49]. In deciding whether a particular business is a manufacturing process or not, regard must be had to the circumstances of each particular case. To constitute a manufacturing process, there must be some transformation i.e., the article must become commercially known as something different from which it acquires its existence. 2. Worker [Sec.2 (1)]. A worker means a person employed directly or by through any agency [including a contractor] with or without the knowledge of the principal employer. He may be employed for or without remuneration. But he must be employed in a manufacturing process, or in cleaning some part of the machinery or premises used for the manufacturing process, or in some other kind of work incidental to, or connected with, the manufacturing process, or the subject of the manufacturing process. A worker does not include any member of the armed forces of the Union. Relationship of master and servant. The expression employed in the above definition means that the relationship of master and servant must exist. It makes no difference whether the worker employed in the manufacturing process is paid wages or not or is paid wages on timerate basis or piece-rate basis. Whether a particular person is a worker depends upon the terms of contract between him and the employer. A worker does not include an independent contractor or his coolies or servants who are not under the control and supervision of the employer. Obligations of workers (Sec. 111). A worker in a factory shall not: (a) willfully interfere with or misuse any appliance, convenience or other thing provided in the factory for the purposes of securing the health, safety or welfare of the worker therein; (b) willfully and without reasonable cause do anything likely to endanger himself or others; and (c) willfully neglect to make use of any appliance or other thing provided in the factory for the purposes of securing the health or safety of the workers therein [Sec.111(1)]. If any worker employed in a factory contravenes any of the provisions of Sec.111 or any rule or order made there under, he shall be punishable with imprisonment for a term which may extend to Rs.100 or with both [Sec.111(2)]. Rights of workers, etc. [Sec.111-A as introduced by the Amendment Act of 1987]. Every worker shall have the right to:
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(i) obtain from the occupier, information relating to workers health and safety at work; (ii) get trained within the factory wherever possible, or to get himself sponsored by the occupier for getting trained in a training center or institute, duly approved by the Chief Inspector, where training is imparted for workers health and safety at work; (iii) represent to the Inspector directly or through his representative in the matter of inadequate provision for protection of his health or safety in the factory. 3. Power [Sec.2 (g)]. It means electrical energy, or any other form of energy which is mechanically transmitted and is not generated by human or animal agency. Different departments to be separate factories or two or more factories to be a single factory (Sec.4)-The occupier of a factory may apply to the State Government that the different departments or branches of the factory of the occupier be treated as separate factories. He may also apply to the State Government that two or more factories of the occupier specified in the application be treated as a single factory. The State Government may, by an order in writing, accede to the request of the occupier. Exemption during public emergency (Sec. 5)- In any case of public emergency the State Government may, by notification in the Official Gazette, exempt any factory or class or description of factories from all or any of the provisions of this Act except Sec. 67 (which deals with prohibition of employment of young persons). This exemption may be for a specified period not exceeding 3 months at a time and subject to such conditions as the State Government may think fit to impose. Public emergency means a grave emergency whereby the security of India or of any part of the territory thereof is threatened, whether by war or external aggression or internal disturbance [Expl. to Sec.5]. Sec.86 empowers the State Government to exempt certain workshops or workplaces attached to public institutions maintained for the purposes of education, training, research or reformation, from all or any of the provisions of the Act. Certain premises deemed to be a factory (Sec.85)- The State Government may, by notification in the Official Gazette, declare any establishment carrying on a manufacturing process to be a factory for the purposes, of the Act even though the number of persons employed therein is less than prescribed minimum number of workers. If the manufacturing process is being carried on by the owner only with the aid of his family. Sec.85 will not apply. 3.1.4 Definitions 1. Adult [Sec. 2 (a)]. An adult means a person who has completed his 18th year of age. 2. Adolescent [Sec. 2 (b)]. An adolescent means a person who has completed his 15th year of age but has not completed his 18th year.
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3. Child [Sec. 2 (c)]. A child means a person who has not completed his 15th year of age. 4. Competent person [Sec.2 (c a) as introduced by the Amendment Act of 1987]. Competent person in relation to any provision of the Act, means a person or an institution recognized as such by the Chief Inspector. The recognition must be for the purposes of carrying out test, examinations and inspections required to be done in a factory under the provisions of the Act. The recognition must be given having regarded to: a) the qualifications and experience of the person and the facilities available at his disposal; or b) the qualifications and experience of the person employed in such institution and facilities available therein with regard to the conduct of such tests, examinations and inspections. It may be noted that more than one person or institution may be recognized as competent persons in relation to a factory. 5. Hazardous process [Sec. 2(c b) as introduced by the Amendment Act of 1967]. It means any process or activity in relation to an industry specified in the First Schedule where, unless special care is taken, raw material used therein or the intermediate or finished products, byeproducts, wastes or effluents thereof would: a) cause material impairment to the health of the persons engaged in or connected therewith, or b) result in the pollution of general environment. The State Government may, by notification in the Official Gazette, amend the First Schedule by way of addition, omission or variation of any industry specified in the First Schedule. The definition of hazardous process has been introduced by the Amendment Act of 1967. 6. Calendar year [Sec. 2 (bb)]-It means the period of 12 months beginning with the 1st day of January in any year. 7. Young person [Sec. 2 (d)] - A young person means a person who is either a child or an adolescent.
8. Day [Sec. 2 (e)]-It means a period of 24 hours beginning at midnight. 9. Week [sec.2(j)]- It means a period of 7 days beginning at midnight on Saturday night or such other night as may be approved in writing for a particular area by the Chief Inspector of Factories. 10. Prime mover [Sec. 2 (h)]- It means any engine, motor or other appliance which generates or otherwise provides power. 11. Transmission machinery [Sec. 2(i)]- It means any shaft, wheel, drum, pulley, system of pulleys, coupling, clutch, driving belt or other appliance or device by which the motion of a prime mover is transmitted to or received by any machinery or appliance. 12. Occupier [Sec. 2 (n)]. Occupier of a factory means the person who
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has ultimate control over the affairs of the factory. In the case of a firm or other association of individuals, any one of the partners or members thereof shall be deemed to be occupier. In the case of a factory owned or controlled by the Central Government or any State Government or any local authority, the person or persons appointed to manage the affairs of the factory by the Central Government, the State Government or the local authority, as the case may be, shall be deemed to be occupier. The definition of occupierhas been considerably enlarged by the Amendment Act of 1987. A partner in a firm who has ultimate control over the affairs of a factory is an occupier [Sohanlal v. State of Rajasthan, (1962), 1 L.L.J. 605]. An occupier may be an owner, a lessee or a mere licensee, but he must have the right to occupy the property and dictate terms of management [Emperor v. Jamsehdji Nruservanji Modi, A.I.R.(1931) Bom. 308]. Hemust be in possession of the factory and control its working. A mere servant charged with specific duties in regard to the control of the machinery, workmen or office is not an occupier. 13. Shift and relay [Sec.2(r)]- Where work of the same kind is carried out by 2 or more sets of workers working during different periods of the day, each of such sets is called a relay and each of such periods is called a shift. References to time of day [Sec 3] - In the Factories Act references to time of day are references to Indian Standard Time, being 5-1/2 hours ahead of Greenwich Mean Time. But for any area in which Indian Standard Time is not ordinarily observed, the State Government may make ruled (a) specifying the area, (b) defining the local mean time ordinarily observed therein, and (c) permitting such time to be observed in all or any of the factories situated in the area. 3.1.5 Approval, licensing and registration of factories The State Government is empowered under Sec. 6 to make rules requiring the submission of plans, and approval, licensing and registration of factories. The effect of Sec.6 is that before a site is used for a factory, previous permission in writing of the State Government or of the Chief Inspector has to be obtained. This permission is granted only when an applicant has duly complied with directions enjoined by Sec.6. Application for permission. Under Sec. 6 the State Government may make rules requiring the submission of plans of factories to the Chief Inspector or the State Government, Sec. 6 further requires the previous permission in writing to be obtained for the site on which the factory is to be situated and for the construction or extension of the factory. An application for such permission may be made to the State Government or the Chief Inspector, a Extended with the duly certified plans and specifications. The State Government may also make rules requiring the registration and licensing of factories and prescribing the fees payable for such registration and licensing and the renewal of licences. But no such licence shall be granted or renewed unless the notice specified in Sec. 7 (as discussed below) has been given [Sec.6(1)].
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Presumption of permission. If on application to the State Government or the Chief Inspector for permission accompanied by plans and specification of a factory, nothing is heard within 3 months, the permission is deemed to be granted [Sec.6 (2)]. Appeal. Where a State Government refuses to grant permission to the site, construction or extension of a factory or to the registration and licensing of a factory, the applicant may within 30 days of the date of such refusal appeal to the Central Government. Where a Chief Inspector refuses to grant such permission, the applicant may, within 30 days of refusal, appeal to the State Government. [Sec. 6(3)]. Notice by occupier [Sec.7] The occupier shall, at least 15 days before he begins to occupy or use any premises as a factory, send to the Chief Inspector a written notice containing a) the name and situation of the factory; b) the name and address of the occupier; c) the name and address of the owner of the premises or building (including the precincts thereof); d) the address to which communications relating to the factory may be sent; e) the nature of the manufacturing process to be carried on in the factory during the next 12 months; f) the total rated horse power installed or to be installed in the factory (not including the rated horse power of any separate standby plant); g) the name of the manager of the factory for the purposes of this Act; h) the number of workers likely to be employed in the factory; and i) such other particulars as may be prescribed [Sec. 7 (1)]. Before a factory engaged in a manufacturing process which is ordinarily carried on for less than 180 working days in an year resumes working, the occupier shall send a written notice to the chief Inspector containing the particulars specified in Sec.7(1) at least 30 days before the date of the commencement of work [Sec.7(3)]. The rules regarding the plans and specifications or a factory are essential to ensure proper sanitation, ventilation, proper working conditions and other health measures. General duties of the occupier (Sec. 7-A)A new Sec.7-A has been introduced by the Amendment Act of 1987, prescribing the general duties of the occupier in regard to the health safety and welfare of the workers in his factory. According to it, every occupier shall ensure, so far as is reasonably practicable, the health, safety and welfare of all workers while they are at work in the factory [Sec.7-A (1)]. Sec.7-A (2) enumerates the matters in regard to health, safety and welfare of the workers. These matters include: a) the provision and maintenance of plant and systems of work in the factory that are safe and without risks to health;
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b) the arrangements in the factory for ensuring safety and absence of risks to health in connection with the use, handling, storage and transport of articles and substances. c) the provision of such information, instruction, training and supervision as are necessary to ensure the health and safety of all workers at work; d) (i) the maintenance of all places of work in the factory in a condition that is safe and without risks to health and (ii) the provision and maintenance of such means of access to and egress from such places as are safe and without such risks; e) the provision, maintenance or monitoring of such working environment in the factory for the workers i.e. (i) safe, (ii) without risks to health, and (iii) adequate as regards facilities and arrangements for their welfare at work [Sec.7-A(2)]. In addition to the above duties, every occupier shall also: a) prepare, and as often as may be appropriate, revise a written statement of his general policy with respect to: (i) the health and safety of the workers at work, and (ii) the organization and arrangements for the time being in force for carrying out that policy, and b) bring the statement and any revision thereof to the notice of all the workers. In some cases as may be prescribed an occupier may be exempted from this duty [Sec.7-A (3)]. General duties of manufactures, etc. as regards articles and substances for use in factories (Sec.7-B). A new section 7-B has been introduced by the Amendment Act of 1987 prescribing the general duties of manufacturer, etc., as regards articles and substances for use in factories. The purpose of Sec.7-B is as follows: 1. Proper design and construction, testing and information. Every person who designs, manufactures, imports or supplies any article for use in any factory shall: a) ensure that the article is so designed and constructed as to be safe and without risks to the health of the workers when properly used; b) carry out or arrange for the carrying out of such tests and examination as may be considered necessary for the effective implementation of the provisions of Clause (a); c) take such steps as may be necessary to ensure that adequate information will be available: i) in connection with the use of article in any factory; ii) about the use for which it is designed and tested; and iii) about any conditions necessary to ensure that the article when put to such use, will be safe, and without risks to the health of the workers [Sec 7B(I)] Articles designed or manufactured outside India. Where an article in designed or manufactured outside India, it shall be obligatory on the part of the importer to see:
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a) that the article conforms to the same standards if such article is manufactured in India, or b) If the standards adopted in the country outside for the manufacture of such article are above the standards adopted in India, that the article conforms to such standards [Provision to Sec. 7B(1)]. 2. Research. Every person, who undertakes to design or manufacture any article for use in factory may carry out or arrange for the carrying out the necessary research, This may be necessary with a view to the discovery and the elimination or minimization of any risks to the health or safety of the workers in which the design or article may give rise [Sec.7B (2)]. He need not repeat the testing, examination or research which has been carried out by some one else or at his instance if he can reasonably rely on the results of testing etc. for the purposes of Sec.7B (1) and (2) [Sec.7B(3)]. 3. Duty to extend to things done in course of business. Any duty imposed on any person by Sec. 7B(1) and (2) shall extend only to things done in the course of business carried on by him and to matters within his control [Sec.7B (4)]. 4. Undertaking by the user. Some times a person may design, manufacture, import or supply an article on the basis of a written undertaking to ensure that the article will be safe and without risks to the health of the workers when properly used. Such an undertaking shall have the effect of relieving the person designing, manufacturing, importing or supplying the article from the duty imposed by Sec. 7-B (1) (a) to such extent as is reasonable having regard to the terms of the undertaking [Sec. 7B (5)]. 5. When article not properly used. For the purposes of Sec. 7B an article is not be regarded as properly used if it is used without regard to any information or advice relating to its use which has been made available by the person who has designed, manufactured, imported or supplied the article [Sec.7-B(6)]. For the purpose of Sec. 7-B article shall include plant and machinery (Expl. To Sec.7-B]. 3.1.6 The Inspecting staff Inspectors (Sec. 8) Appointment- Sec. 8 provides for the appointment of Chief Inspector, Additional Chief Inspectors, Joint Chief Inspectors, Deputy Chief Inspector and Inspectors. According to it, the State Government may by notification in the Official Gazette, appoint any person to be a Chief Inspector to exercise the powers conferred on him by the Factories Act. He shall also exercise the powers of an Inspector throughout the State (Sec.8 (2)]. The State Government may also appoint by notification in the Official Gazette, such persons as possess the prescribed qualifications to be Inspectors. It may assign to the Inspectors such local limits as it may think fit. [Sec.8 (1)]. The State Government may appoint by notification in the Official Gazette,
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also appoint as many Additional Chief Inspectors, Joint Chief Inspectors, Deputy Chief Inspectors and as many other officers as it thinks fit to assist the Chief Inspector and to exercise such of the powers of the Chief Inspector as may be specified in the notification [Sec. 8(2-A)]. Every Chief Inspector, Additional Chief Inspector, Joint Chief Inspector, Deputy Chief Inspector, Inspector and every other officer appointed under Sec. 8 is deemed to be a public servant within the meaning of the Indian Penal Code, 1860 [Sec.8(7)]. No person who is or becomes directly or indirectly interested in a factory or in any process or business carried on therein or in any patent or machinery connected therewith shall act as a Chief Inspector, Additional Chief Inspector, Joint Chief Inspector, Deputy Chief Inspector, Inspector or any other officer appointed under Sec.8 (2-A) [Sec.8 (3)]. The State Government may also, by notification in the Official Gazette, appoint additional Inspectors within such local limits as it may assign to them respectively [Sec.8(5)]. In any area where there are more Inspectors than one, the State Government may declare the power which such Inspectors shall respectively exercise and the Inspector to whom the prescribed notices are to be sent [Sec.8(6)]. Powers of Inspectors [Sec.9- An Inspector may within the local limits for which he is appointed: a) enter, with assistants who are in the service of Government or any local or other public authority or with an expert, the premises of a factory; b) make examination of the premises, plant, machinery, article or substance; c) inquire into any accident or dangerous occurrence, whether resulting in bodily injury, disability or not, and take on the spot or otherwise statements of any person which he may consider necessary for such inquiry; d) require the production of any prescribed register or any other document relating to the factory; e) seize, or take copies of, any register, record or other document or any portion thereof, as he may consider necessary in respect of any offence under this Act, which he has reason to believe, has been committed; f) direct the occupier that any premises or any part thereof, or anything lying therein, shall be left undisturbed (whether generally or in particular respects) for so Extended as is necessary for the purpose of any examination under Clause (b);
g)
take measurements and photographs and make such recordings as he considers necessary for the purpose of any examination under Clause (b) taking with him any necessary instrument or equipment; h) in case of any article or substance found in any premises, being an article or substance which appears to him as having caused or is likely to cause
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danger to the health or safety of workers, direct it to be dismantled or subject it to any process of test (but not so as to damage or destroy it unless the same is necessary for carrying out the purposes of this Act). Further, he may take possession of any such article or substance or a part thereof, and detain it for so Extended as is necessary for such examination; i) exercise such other powers as may be prescribed. The above powers of an Inspector are subject to any rules which may be made by the State Government in this behalf. Additional Powers. An Inspector has also the power: a) to require medical examination of a young person working in a factory(Sec.75), and also b) to take sample of any substance used, or intended to be used, in a factory for the purpose of finding out if the substance is injurious to the health of the worker[Sec.91]. Penalty for obstructing Inspector [Sec.95] - Whoever willfully obstructs an Inspector in the exercise of any power conferred on him by or under the Act, or fails to produce on demand by an Inspector any registers or documents, shall be punished with imprisonment up to 6 months or with fine up to Rs.10, 000 or with both. Certifying surgeons Appointment. [Sec.10] - The State Government may appoint qualified medical practitioners to be certifying surgeons for specified local limits or factories [Sec.10 (1)]. A certifying surgeon may, with the approval of the State Government, authorize any qualified medical practitioner to exercise any of his powers [Sec.10 (2)]. But no person shall be appointed a certifying surgeon who is or becomes the occupier of a factory or is or becomes directly or indirectly interested therein [Sec.10 (3)]. The State Government may exempt any person or class of persons from the provisions of Sec. 10 (3) in respect of any factory or class or description of factories [Provision to Sec.10 (3)]. The exemption shall however be made by order in writing and subject to such conditions as may be specified in the order. Duties of certifying surgeons : The certifying surgeon shall carry out such duties as may be prescribed in connection with: a) the examination and certification of young persons; b) the examination of persons engaged in factories in dangerous occupations or processes; c) the exercising of such medical supervision as may be prescribed for any factory where (i) cases of illness have occurred which it is reasonable to believe are due to the nature of the manufacturing process carried on, or other conditions of work prevailing, therein; (ii) by reason of any change in the manufacturing process carried on or in the substances used therein, there is a likelihood of injury to the health of workers employed in that manufacturing process; (iii) young persons are, or are about to be, employed in any work which is likely to cause injury to their health [Sec.10(4)].
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3.1.7 Provisions of Health, Safety and Welfare The act makes detailed provisions in regard to various matters relating to health, safety and welfare of the workers. These provisions impose upon the occupiers or managers certain obligations (a) to protect workers, unwary as well as negligent, from accidents and (b) to secure for them in employment, conditions conducive to their health, safety, and welfare. These provisions also require the occupiers or managers to maintain inspection staff and to make provision for maintenance of health, cleanliness, prevention of overcrowding, and amenities like lighting, ventilation, drinking water, etc. I-Health Chapter III (Sec. 11 to 20) of the Act deals with the provisions ensuring the health of the workers in the conditions under which work is carried on in factories. These provisions are as follows: 1. Cleanliness (Sec.11) - Factory to be kept clean and free from effluvia and dirt: 1) Every factory shall be kept clean and free from effluvia arising from any drain, privy, or other nuisance. Accumulation of dirt and refuse shall be removed daily by some effective method. The floor or every workroom shall be cleaned at least once in every week by washing, using disinfectants, where necessary, or by some effective method. 2) Effective means of drainage : Where a floor is liable to become wet in the course of any manufacturing process to such an extent as is capable of being drained, effective means of drainage shall be provided. 3) Use of disinfectants, etc., painting and varnishing : Use of disinfectants, detergents, painting, repainting and varnishing, re-varnishing, whitewashing or colour washing shall be resorted to. 2. Disposal of wastes and effluents (Sec.12). (1) Treatment of wastes and effluents and their disposal : Effective arrangements shall be made in every factory for the treatment of wastes and effluents due to the manufacturing process carried on therein, so as to render them innocuous, and for their disposal [Sec.12(1)]. 2) Rules by the State Government prescribing arrangements : The State Government may make rules prescribing the arrangements to be made in this regard. It may also require that such arrangements shall be approved by such authority as may be prescribed [Sec.12 (2)]. 3) Ventilation and temperature (Sec.13) (1) Maintenance of adequate ventilation and temperature : Effective and suitable provision shall be made in every factory for securing and maintaining in every workroom a) adequate ventilation by the circulation of fresh air, and
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b) such a temperature as will secure to workers therein reasonable conditions of comfort and prevent injury to health. 2) Process producing high temperature to be separated : The walls and roofs shall be of such materials and so designed that the temperature shall not be exceeded but kept as low as practicable. The process which produces high temperatures shall be separated from the workroom, by insulating the hot parts or by other effective means [Sec.13 (1)]. 3. Standard of adequate ventilation and temperature to be prescribed and provision of measuring instruments : The State Government may prescribe a standard of adequate ventilation and reasonable temperature for any factory and direct that proper measuring instruments shall be provided and such records as may be prescribed shall be maintained [Sec.13 (2)]. 4. Prescription of measures by the State Government to reduce temperatures : Where excessively high temperatures can be reduced by such methods as whitewashing, spraying, or insulating and screening outside walls or roofs or windows, or by raising the level of the roof or by insulating the roof, the State Government may prescribe such of these or other methods as shall be adopted in the factory [Sec. 13 (3)]. 5. Service of notice by the Chief Inspector on the occupier to adopt measures for reduction of temperatures : If it appears to the Chief Inspector that excessively high temperatures in any factory can be reduced by the adoption of suitable measures, he may serve on the occupier an order in writing specifying the measures which in his opinion should be adopted and requiring them to be carried out before a specified date [Sec. 13 (3)]. 4. Dust and fume (Sec.14). (1) Measures for prevention of inhalation or accumulation of dust and fumes : Where dust or fume or impurity of such a nature as is likely to be injurious or offensive to the workers is given off as a result of the manufacturing process being carried on in a factory, effective measures shall be taken in the factory for prevention of inhalation or accumulation of dust and fumes in workrooms. If for such a purpose any exhaust appliance is necessary, it shall be applied as near as possible to the point of origin of the dust, fume or other impurity and such point shall be enclosed so far as possible [Sec.14(1)]. 2) Exhaust for internal combustion engine : A stationary internal combustion engine shall not be operated unless the exhaust is conducted into the open air. Other internal combustion engines shall not be operated in any room unless effective measures have been taken to prevent accumulation of fumes there from which are injurious [Sec.14 (2)]. 5. Artificial humidification (Sec.15). (1) Prescription of standards of humidification, ventilation and cooling of air. In respect of all factories in which the humidity of the air is artificially increased, the State Government may make rules prescribing standards
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of humidification. It may also make rules regulating the methods used for artificially increasing the humidity of the air. It may further make rules prescribing methods to be adopted for securing adequate ventilation and cooling of the air in the workrooms [Sec.15(1)]. 2) Water used for artificial humidification to be clean. In any factory in which the humidity of the air is artificially increased, the water used for the purpose shall be taken from a public supply or other source of drinking water, or shall be effectively purified before it is so used [Sec.15 (2)]. 6. Overcrowding (Sec.16). (1) Overcrowding injurious to health of workers to be avoided. There shall not be overcrowding in any room of the factory so as to be injurious to the health of the workers employed therein [Sec.16 (1)]. (2) 9.9/14.2 cubic metres of space per worker. There shall be at least 9.9 cubic metres (for the factories in existence at the time of the commencement of the Act) and 14.2 cubic metres (for the factories built after the commencement of the Act) of space for every worker. In calculating the space of 9.9 or 14.2 cubic metres, no account shall be taken of any space which is more than 4.2 metres, above the level of the floor of the room [Sec.16 (2)]. 3) Notice of maximum of workers to be employed in a workroom. If the Chief Inspector by order in writing so requires, there shall be posted in each workroom of the factory a notice specifying the maximum number of workers who may be employed in the workroom [Sec.16 (3). 7. Lighting (Sec.17). (1) Sufficient and suitable lighting in every part of factory : In every part of a factory where workers are working or passing there shall be provided and maintained sufficient and suitable lighting, natural or artificial, or both (Sec.17 (1)]. 2) Glazed windows and skylights to be kept clean : All glazed windows and skylights used for the lighting of the workrooms shall be kept clean on both the inner and outer surfaces and free from obstruction [Sec.17 (2). 3) Measures for prevention of glare and formation of shadows : Effective provision shall also be made for the prevention of (a) glare, either directly from a source of light or by reflection from a smooth or polished surface; and (b) the formation of shadows to such an extent as to cause eye strain or the risk of accident to any worker [Sec.17 (3)]. 4) Prescription of standards of sufficient and suitable lighting : The State Government may prescribe standards of sufficient and suitable lighting for factories or for any class or description of factories or for any manufacturing process [Sec.17 (4)]. 8. Drinking Water (Sec.18). (1) Suitable points for wholesome drinking water : In every factory, effective arrangements shall be made to provide and maintain at suitable
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points conveniently situated for all workers employed therein a sufficient supply of wholesome drinking water [Sec.18(1)]. 2) Drinking points to be legibly marked and to be away from urinal, latrine etc : All points for supply of drinking water shall be legibly marked drinking water in a language understood by a majority of the workers employed in the factory. Such points shall be situated beyond 6 metres of any washing place, urinal, latrine, spittoon, open drain carrying silage or effluent or any other source of contamination unless shorter distance is approved in writing by the Chief Inspector [Sec.18(2)]. 3) Cooling of drinking water where more than 250 workers employed : In every factory wherein more than 250 workers are ordinarily employed, provision shall be made for cooling drinking water during hot weather by effective means and for distribution thereof [Sec.18 (3)]. 9. Latrines and urinals (Sec.19). (1) Separate latrines and urinals for male and female workers conveniently situated and adequately lighted and ventilated. In every factory, separate enclosed accommodation of latrines and urinals of prescribed types of male and female workers shall be provided for. Such accommodation shall be conveniently situated and accessible for workers at all times. It shall be adequately lighted and ventilated and maintained in a clean and sanitary condition. Sweepers shall also be employed for keeping clean latrines, urinals and washing places [Sec.19 (1)]. 2) Latrine and urinal accommodation to be prescribed sanitary types-floors and walls to be glazed and their cleaning. In factories wherein more than 250 workers are ordinarily employed (1) all latrine and urinal accommodation shall be prescribed sanitary types; (b) the floors and internal walls, up to a height of 90 centimeters, of the latrines and urinals and the sanitary blocks shall be laid in glazed tiles or otherwise finished to provide a smooth polished impervious surface; (c) the sanitary pan of latrines and urinals shall be thoroughly washed and cleaned at least once in every 7 days with suitable detergents or disinfectants, or with both [Sec. 19(2)]. 10. Spittoons [Sec.20]. (1) Sufficient number of spittoons : In every factory, there shall be provided a sufficient number of spittoons in convenient places and they shall be maintained in a clean and hygienic condition. [Sec.20 (1)]. 2) Display of notice of provision of spittoons : No person shall spit within the premises of a factory except in the spittoons provided for the purpose. A notice containing the provision of spittoons in the factory shall be prominently displayed at suitable places in the premises. The penalty for spitting anywhere except in the spittoons shall also be prominently displayed [Sec.20 (3)]. 3) Penalty : Whoever spits in contravention of Sec. 20 (3) shall be punishable with fine not exceeding Rs.5 [Sec.20 (4)].
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II-Safety The safety provisions are absolute and obligatory in their character and the occupier of every factory is bound to follow them. They are contained in Chapter IV (Secs. 21 to 41). 1. Fencing of machinery (Sec.21). (1) Dangerous part of every machinery to be securely fenced : In every factory every dangerous part of every machinery shall be securely fenced by safeguards of substantial construction which shall be constantly maintained and kept in position while the parts of machinery they are fencing are in motion or in use. Machineries covered by Sec. 21. The following machineries are covered by Sec. 21, viz. a) Every moving part of a prime mover, and every fly-wheel connected to a prime mover, whether the prime mover or fly wheel is in the engine house or not; b) The headrace and tailrace of every water-wheel and water turbine; c) Any part of a stock-bar which projects beyond the headstock of a lathe; d) Every part of an electric generator, a motor or rotary converter; e) Every part of transmission machinery; and f) Every dangerous part of any other machinery [Sec.21 (1)] 2) Prescription of further precautions by State Government : The State Government may by rules prescribe much further precautions as it may consider necessary in respect of any particular machinery or part thereof [Sec.21(2)]. 2. Work on near machinery in motion (Sec.22) : (1) Examination of machinery in motion by a trained adult male worker. Where in any factory it becomes necessary to examine any part of machinery while the machinery is in motion, such examination shall be made only by a specially trained adult male worker wearing tight fitting clothing. The clothing shall be supplied by the occupier. The name of the person so engaged shall be entered in the prescribed register. Further he shall be furnished with a certificate of his appointment (Sec. 22 (1)]. 2) Restriction on women and young persons. No woman or young person shall be allowed to clean, lubricate or adjust any part of machinery in motion if it would expose the woman or young person to risk of any injury, from any moving part (Sec. 22(2)]. 3. Employment of young persons on dangerous machines (Sec.23). (1) Restriction on young persons to work on dangerous machines. No young person shall be required or allowed to work on any machine to which this Section applies unless: (a) he has been fully instructed as to the dangers arising in connection with the machine and the precautions to be observed; and (b) he has received sufficient training to work on the machine, or his under adequate supervision by a person who has a thorough knowledge and experience of the machine {Sec. 23 (1)].
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2) Machines dangerous for young persons to be specified by the State Governmen:t The State Government shall specify machines which in its opinion are of such a dangerous character that young persons ought not to work at elm unless the foregoing requirements are complied with (Sec. 23(2)]. 4. Striking gear and devices for cutting off power (Sec.24). (1) Suitable striking gear to be provided, maintained and used. In every factory, suitable striking gear or other efficient mechanical appliance shall be provided and maintained and used to move driving belt to and from fast and loose pulleys which form part of transmission machinery. Driving belts when not in use shall not be allowed to rest or ride upon the shafting in motion. (Sec.24 (1). 2) Locking device to prevent accidental starting of transmission machinery. When a device, which can inadvertently shift from off to on position, is provided in a factory to cut off power, arrangements shall be provided for locking the device in safe position. This is preventing accidental starting of the transmission machinery or other machines to which the device is fitted (Sec. 23(3)]. 5. Self acting machines (Sec. 25). Traversing part not allowed running within a distance of 45 centimeters from any fixed structure. No traversing part of a self-acting machine in any factory and no material carried thereon shall be allowed to run on its outward or inward traverse within a distance of 45 centimeters from any fixed structure which is not part of the machine. This provision shall apply only if the space over which the traversing part of the self acting machine runs in a space over which any person is liable to pass, whether in the course of his employment or otherwise. 6. Casing of new machinery (Sec.26). (1) Casing to prevent danger : All machinery driven by power and installed in any factory after 1st April, 1949, every set screw, bolt or key on any revolving shaft, spindle, wheel or pinion shall be so sunk, encased or otherwise effectively guarded as to prevent danger. Further, all spur, worm and other toothed or friction gearing not requiring frequent adjustments while in motion shall be completely encased unless it is safely situated (Sec. 26(1)]. 2) Penalty : If any one sells or lets on hire either directly or as an agent, any machine which does not comply with the provisions of Sec. 26, he shall be punishable with imprisonment up to 3 months or with fine up to Rs.500 or with both (Sec. 26(2)]. 7. Prohibition of employment of women and children near cotton openers (Sec.27) : No woman or child shall be employed in any part of a factory for pressing cotton in which a cotton-opener is at work. If the feed-end of a cotton-opener is in a room separated from the delivery end by a partition extending to the roof or to a specified height, women and children may be employed on the side of the partition where the feed-end is situated.
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8. Hoists and lifts (Sec. 28) : (1) Hoists and lifts to be of good, mechanical construction and to be properly maintained and examined once in every 6 months. In every factory every hoist and lift shall be of good mechanical construction, sound material, and adequate strength. Further it shall be sufficiently protected by enclosures fitted with gates. It shall also be properly maintained and shall be thoroughly examined by a competent person at least once in every 6 months. A register containing the prescribed particulars of every such examination shall be kept. The maximum safe working load shall also be plainly marked on every hoist or lift, and no load greater than such load shall be carried thereon. The cage of every hoist or lift used for carrying persons shall be fitted with a gate on each side from which access is afforded to a landing. The gate shall be fitted with interlocking or other efficient device to secure that the cage cannot be moved unless the gate is closed. For the purposes of Sec. 28, no lifting machine or appliances shall be deemed to be a hoist or lift unless it has a platform or cage, the direction or movement of which is restricted by a guide or guides (Expl. To Sec. 28) added by the Amendment Act of 1987). 9. Lifting machines, chains, ropes and lifting tackles (Sec. 29) (1) Cranes and lifting machines etc. to be of good construction and to be examined once in every 12 months. In every factory, cranes and other lifting machines (and every chain, rope and lifting tackle for the purpose of raising or lowering persons, goods or materials) shall be of good construction, sound material, and adequate strength, free from defects and properly maintained. They shall be thoroughly examined by a competent person at least once in every 12 months. Aregister containing the prescribed particulars of every such examination shall be kept (Sec. 29(1)(d)]. 2) Cranes and lifting machines not to be loaded beyond safe working load. The aforesaid machines shall not, except for the purpose of test, be loaded beyond the safe working load which shall be plainly marked thereon together with an identification mark and duly entered in the prescribed register. Where this is not practicable, a table showing the safe working loads of the aforesaid machinery in use shall be displayed in prominent positions on the premises (Sec. 29(1)(b)]. 3) Crane not to approach within 6 meters of a place where any person is employed or working. If any person is employed or working on or near the wheel track of a traveling crane in any place where he would be liable to be struck by the crane, effective measures shall be taken to ensure that the crane does not approach within 6 meters of that place (Sec. 29(1)(c)]. 10. Revolving machinery (Sec. 30). (1) Notice of maximum safe working speed of grindstone or abrasive wheel, etc. to be kept near machine, In every factory in which the process of grinding is carried on, there shall be permanently kept near machine a notice indicating (a) the maximum safe working peripheral speed of every grindstone or abrasive wheel. (b) the speed of the shaft or spindle upon
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which the wheel is mounted, and (c) the diameter of the pulley upon such shaft or spindle necessary to secure such safe working peripheral speed (Sec. 30(1)]. 2) Speeds not to be exceeded. (a) The speeds indicated in notices under Sec. 20(1) shall not be exceeded (Sec. 30(2)]. b) Effective measures shall be taken in every factory to ensure that the safe working peripheral speed of every revolving vessel, cage, basket, flywheel, pulley, disc or similar appliance driven by power is not exceeded (Sec. 30)] 11. Pressure plant (Sec.31). 1) Safe working pressure not to be exceeded : If in any factory any plant or any machinery or part thereof is operated at a pressure above atmospheric pressure, effective measures shall be taken to ensure that the safe working pressure is not exceeded (Sec. 31(1)]. 2) Rule-making power of the State Government providing for examination and exemption. The State Government may make rules providing for the examination and testing of any plant or machinery and providing for additional safely measures (Sec. 31(2)]. 12. Floors, stairs and means of access (Sec. 32). In every factory: a) all floors , steps, stairs passages and gangways shall be of sound construction and properly maintained. Further they shall be kept free from obstructions and substances likely to cause persons to slip and hand rails shall be provided where necessary: b) there shall, so far as is reasonably practicable, be provided and maintained safe means of access to every place at which any person is at any time required to work; c) when any person has to work at a height from where he is likely to fall, provision shall be made, so far as is reasonably practicable, by fencing or otherwise, to ensure the safety of the person so working. This restriction is not applicable if the place provides secure foothold and, where necessary secure handhold. 13. Pits, sumps, openings in floors, etc. (Sec. 33) (1) Pits, sumps, etc. to be securely covered or fenced. In every factory, pits, sumps, fixed vessels, tanks, openings in the ground or in the floor shall be securely covered or securely fenced (Sec. 33(1)]. 2) Exemption. The State Government may, by order in writing, exempt any factory in respect of any vessel, sump, tank, pit or opening from compliance with the above provision (Sec. 33(2)]. Securely fencing a pit means covering or fencing it in such a way that it ceases to be a source of danger to those who have occasion to go near there [State of Mysore v. Narayana Raghvendra (1967) 2 L.L.J. 616]. 14. Excessive weights (Sec. 34) 1) Prohibition on lifting or carrying of excessive weights. No person shall be employed in any factory to lift, carry or move any load so heavy as to
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be likely to cause him injury (Sec. 34(1)]. 2) Maximum weights to be lifted or carried to be prescribed. The State Government may make rules prescribing the maximum weights which may be lifted, carried or moved by adult men, adult women, adolescents and children employed in factories or in any class or description of factories or in carrying on any specified process (Sec. 34 (2)]. 15. Protection of eyes (Sec. 35). In very factory, screen or suitable goggles shall be provided for the protection of persons employed on, or in immediate vicinity of mechanical or other processes which involve any danger or injury to the workers eyesight. The risk of injury to the eyes may be from particles or fragments thrown off in the course of the process or by reason of exposure to excessive light. 16. Precautions against dangerous fumes (Sec. 36) (1) Prohibition on entry into any chamber, tank, vat, pit, pipe, etc. where any gas, fume etc. is present. No person shall be required or allowed to enter any chamber, tank, vat, pit, pipe, flue or other confined space in any factory in which any gas, fume, vapour or dust is likely to be present to such an extent as to involve risk to persons being overcome thereby, unless it is provided with a manhole of adequate size or other effective means of egress (Sec. 36(1)]. 2) Practicable measures to be taken for removal of gas, fume, etc. No person shall be required or allowed to enter any confined space as is referred to in Sec. 36(1), until all practicable measures have been taken to remove any gas, fume, vapour, or durst, which may be present so as to bring its level within the permissible limits and to prevent any ingress of such gas, fume, vapour or dust and unless: a) a certificate in writing has been given by a competent person, based on a test, carried out by himself that the space is reasonably free from dangerous gas, fume, vapour or dust; or b) Such person is wearing suitable breathing apparatus and a belt securely attached to a rope, the free end of which is held by a person outside the confined space (Sec. 36(2)]. 17. Precautions regarding the use of portable electric light (Sec 36A). 1. No portable electric light or any other electric appliance of voltage exceeding 24 volts shall be permitted for use inside any chamber, tank, vat, pit; flue or other confined space in a factory, unless adequate safety devices are provided. If any inflammable gas, fume or dust is likely to explode on ignition, all practicable measures shall be taken to prevent any such explosion by: a) effective enclosure of the plant or machinery used in the process, b) removal or prevention of the accumulation of such dust, gas, fume or vapour and
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c) exclusion or effective enclosure of all possible sources of ignition (Sec. 37(1)]. 2) Provision of chokes, vents, etc. When the plant or machinery cannot withstand the probable pressure which an explosion would produce, all practicable measures shall be taken to restrict the spread, any effects of the explosion. This shall be done by the provision in the plant or machinery of chokes, baffles, vents or other effective appliances (Sec. 37(2)]. 3) Special measures where explosive or inflammable gas or vapour is under pressure greater than atmospheric pressure. Where any part of the plant or machinery in a factory contains an explosive or inflammable gas or vapour under pressure greater than atmospheric pressure, that part shall not be opened unless special measures prescribed for that are taken (Sec. 37(3)]. These measures are as follows: a) The flow of gas or vapour shall be effectively stopped by a stop valve or other means; b) All practicable measures shall be taken to reduce the pressure to the atmospheric pressure; c) Where the fastening of such part has been loosened or removed, the fastening shall be secured or securely replaced (Sec. 37(3)]. Further, a plant, tank or vessel containing explosive or inflammable substance shall not be welded, brazed, soldered or cut by applying heat until such substances and fumes are rendered non-explosive and noninflammable (Sec. 37(4)]. 4) Exemption. The State Government may by rules exempt any factory from compliance with all or any of the provisions of Sec. 37, Sec. 37(5)]. 19. Precautions in case of fire. (Sec. 38 as substituted by the Amendment Act of 1967). (1) Practicable measures to prevent outbreak of fire and its spread. In every factory, all practicable measures shall be taken to prevent outbreak of fire and its spread, both internally and externally, and to provide and maintain: a) safe means of escape for all persons in the event of a fire, and b) the necessary equipment and facilities for extinguishing fire (Sec. 38(1)]. 2) Familiarity of workers with means of escape. Effective measures shall be taken to ensure that in every factory all the workers are familiar with the means of escape in case of fire and have been adequately trained in the routine to be followed in such cases. (Sec.38 (2)]. 3) Rule-making power of the State Government. The State Government may make rules, in respect of any factory or class or description of factories, requiring the measures to be adopted to give effect to the above provisions (Sec. 38(3)]. 4) Additional measures. If the Chief Inspector, having regard to the nature of the work carried on in any factory, the construction of such factory, special risk to life or safety, or any other circumstances, is of the opinion
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that the measures provided in the factory are inadequate, he may, by order in writing, require that such additional measures as he may consider reasonable and necessary be provided in the factory before such date as is specified in the order (Sec. 38(4)]. 20. Power to require specifications of defective parts or tests of stability (Sec. 39) : If it appears to the Inspector that any building or part of a building, machinery or plant in a factory may be dangerous to human life or safety, he may ask occupier or the manager or both of the factory: a) to furnish drawings, specifications and other particulars as may be necessary to determine, whether such building, ways, machinery or plant can be used with safety; or b) to carry out the tests in the specified manner and inform the Inspector of the results thereof. 21. Safety of building and machinery (Sec. 40) : (1) Service of order by Inspector on occupier to take specified measures in case of dangerous building or machinery or plant. If any building or part of a building or machinery or plant in a factory is in such a condition that it is dangerous to human life or safety, the Inspector may serve on the occupier or the measures which in his opinion shall be adopted and requiring them to be carried out before a specified date. (Sec. 40(1)]. 2) Prohibition of use where danger is imminent : Where it appears to the Inspector that the use of any such building, machinery, etc. involves imminent danger to human life or safety, he may prohibit its use until it has been properly repaired or altered (Sec. 40(2)]. 22. Maintenance of building (Sec. 40-A) : Where it appears to the Inspector that any building or any part of the building in a factory is in such a state of disrepair as is likely to lead to conditions detrimental to the health and welfare of the workers, he may serve on the occupier or manager or both of the factory an order in writing specifying the measures which should be taken. he may further require such measures to be carried out before such date as is specified in the order. 23. Safety Officers (Sec. 40-B) : In every factory (i) wherein 1,000 or more workers are ordinarily employed, or (ii) wherein, in the opinion o the State Government, any manufacturing process or operation is carried on, which process or operation involves any risk of bodily injury, poisoning or disease, or any other hazard to health, to the persons employed in the factory, the occupier shall, if so required by the State Government by notification in the Official Gazette, employ such number of Safety Officers as may be specified in that notification (Sec. 40B) (1)]. The duties, qualifications and conditions of service of Safety Officers shall be such as may be prescribed by the State Government (Sec. 40-B (2)]. Power to make rules to supplement the above provisions (Sec. 41) : The State Government may make rules requiring the provision in any factory of such further devices and measures for securing the safety of
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persons employed therein as if may deem necessary. Provisions relating to hazardous processes (New Chapter IV A, Sec. A to 41H as introduced by the Amendment Act of 1967) Site Appraisal Committee (Sec. 41-A) Constitution of the committee. The State Government may, for purposes of advising it to consider applications for grant of permission for the initial location of a factory involving a hazardous process or for the expansion of any such factory, appoint a Site Appraisal Committee. The committee shall consist of: a) the Chief Inspector of the State who shall be its Chairman; b) a representative of the Central Board for the Prevention and Control of Air Pollution referred to in Sec. 3 of the Air (Prevention and Control of Pollution Act) 1981; c) a representative of the Central Board for the Prevention and Control of Air Pollution referred to in Sec. 3 of the Air (Prevention and Control of Pollution Act0 1981; d) a representative of the State Board appointed under Sec. 4 of the Water (Prevention and Control of Pollution) Act, 1974; e) a representative of the State Board for the Prevention and Control of Air Pollution referred to the Sec. 5 of the Air (Prevention and Control of Pollution) Act, 1981 ; f) a representative of the Department of Environment in the state; g) a representative of the Meteorological Department of the Government of India; h) an expert in the field of occupational health; i) a representation of the Town Planning Department of the State Government; and j) not more than 5 other members who may be co-opted by the State Government. The co-opted members shall be (i) a scientist having specialized knowledge of the hazardous process which will be involved in the factory. (ii) a representative of the local authority within whose jurisdiction the factory is to be established, and (iii) not more than 3 other persons as deemed fit by the State Government (Sec. 41A(1)]. Where any process relates to a factory owned or controlled by the Central Government or to a corporation or a company owned or controlled by the Central Government, the State Government shall co-opt in the Site Appraisal Committee. A representative nominated by the Central Government as a member of that committee (Sec. 41-A (3)]. Functions of the committee: The Site Appraisal Committee shall examine an application for the establishment of a factory involving a hazardous process. It shall make its recommendation to the State Government within a period of 90 days of the receipt of such application in the prescribed form (Sec. 41A (2)]. The Site Appraisal Committee shall have power to call for any information
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from the person making an application for the establishment or expansion of a factory involving a hazardous process (Sec. 41 A (4)]. No further approval required. Where the State Government has granted approval to an application for the establishment or expansion of a factory involving a hazardous process, it shall not be necessary for an applicant to obtain a further approval from the Central Board or the State Board established under the Water (Prevention and Control of Pollution) Act, 1974 and the Air Prevention and Control of Pollution Act, 1981 (sec 41A (5)]. Compulsory disclosure of information by the occupier (Sec 41-B) Disclosure to whom : The occupier of every factory involving a hazardous process shall disclose all information regarding dangers, including health hazard. He shall also disclose the measures to overcome such hazards arising from the exposure to or handling of the materials or substances in the manufacturing, transportation, storage and other processes. The information is required to be disclosed to (a) the workers employed in the factory. (b) the Chief Inspector, (c) the local authority within whose jurisdiction the factory is situate, and the general public in the vicinity (Sec. 41-B(1)]. The information, so furnished shall include accurate information as to the quantity specifications and other characteristics of wastes and the manner of their disposal (Sec. 41-B (3)]. Policy with regard to health and safety of workers : The occupier shall, at the time of registering the factory involving a hazardous process, lay down a detailed policy with respect to the health and safety of the workers employed therein, He shall intimate such policy to the Chief Inspector and the local authority. Thereafter, he shall, at such intervals as may be prescribed, inform the Chief Inspector and the local authority of any change made in the said policy (Sec. 4) B (2). On site emergency plan and disaster control measure : Every occupier shall, with the approval of the Chief Inspector, draw up an, on site emergency plan and detailed disaster control measures for his factory. He shall also make known to the workers employed therein and to the general public living in the vicinity of the factory the safety measures required to be taken in the event of an accident taking place (Sec. 41-B (4)]. Information to the Chief Inspector before commencement : If a factory proposes to engage in a hazardous process, the occupier of the factory stall, within a period of 30 days before the commencement of such process, inform the Chief Inspector of the nature and details of the process in such form and in such manner as may be prescribed (Sec. 41-B (5)]. If the occupier contravenes this provision the license issued under Sec. 6 to such factory stall, not withstanding any penalty to which the occupier or factory shall be subjected to under the provisions of this Act be liable for cancellation (Sec.41 B(6)]. Handling, usage, transportation of hazardous substances : The occupier of a factory involving a hazardous process shall get permission with the previous approval of the Chief Inspector lay down measures for the handling, usage, transportation and storage of hazardous substances
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inside the factory premises. He shall also lay down the measures for the disposal of such substances outside the factory premises. He shall also publicize these measures in the manner prescribed among the worker s and the general public living in the vicinity. (Sec. 41-B (7)]. Specific responsibility of the occupier in relation to hazardous processes (Sec. 41-C) Every occupier of a factory involving any hazardous process shall: a) maintain accurate and up-to-date health records or, as the case may be, medical records, of the workers in the factory who are exposed to any chemical, toxic or any other harmful substances which are manufactured, stored, handled or transported. Such records shall be accessible to the worker s subject to such conditions as may be prescribed; b) appoint persons who possess qualifications and experience in handling hazardous substances and are competent to supervise such handling within the factory and to provide at the working place all the necessary facilities for protecting the workers in the manner prescribed : Where any question arises as to the qualifications and experience of a person so appointed, the decision of the Chief Inspector shall be final. c) provide for medical examination of every worker i) before such worker is assigned to a job involving the handling of or working with a hazardous substance, and
ii) while continuing in such job, and after he has ceased to work in such job, at intervals not exceeding 12 months in such manner as may be prescribed. Power of Central Government to appoint Inquiry Committee (Sec 41-D) Appointment of an Inquiry Committee in the event of occurrence of an extraordinary situation : The Central Government may, in the event of the occurrence of an extraordinary situation involving a factory engaged in a hazardous process, appoint an Inquiry Committee to Inquire into the standards of health and safety observed in the factory. The object of appointing the committee is to find out the causes of any failure or neglect in the adoption of any measures or standards prescribed for the health and safety of the workers employed in the factory or the general public affected or likely to be affected due to such failure or neglect and for the prevention and recurrence of such extraordinary situation in future in such factory or elsewhere (Sec. 41-D (1)]. Membership of the Committee and its tenure of office. The Committee shall consist of a Chairman and 2 other members. The terms of reference of the Committee and the tenure of office of its members shall be such as may be determined by the Central Government according to the requirements of the situation [Sec.41-D (2)]. Recommendations of the Committee advisory- The recommendations of the Committee shall be advisory in nature [Sec.41-D (3)].
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Emergency Standards (Sec. 41-E). Sometimes standards of safety may not have been prescribed in respect of a hazardous process or class of hazardous processes, or the standards so prescribed may be inadequate. In such a case if the Central Government is satisfied, it may direct the Director General of Factory Advice Service and Labour Institutes or any institution specialized in matters relating to standards of safety in hazardous processes, to lay down emergency standards for enforcement of suitable standards in respect of such hazardous processes. [Sec. 41-E (1)]. The emergency standards so laid down shall, until these are incorporated in the rules made under this Act, be enforceable and have the same effect as if they had been incorporated in the rules made under this Act. [Sec. 41-E (2)]. Permissible limits of exposure of chemical and toxic substances (Sec. 41-F). The maximum permissible threshold limits of exposure of chemicals and toxic substances in manufacturing processes (where hazardous or otherwise) in any factory shall be of value indicated in the Second Schedule [Sec.41-F (1)]. The Second Schedule, added by the Amendment Act of 1987, lays down permissible levels of certain chemical substances in work environment. The Central Government may at any time for the purpose of giving effect to any scientific proof obtained from specialized institutions or experts in the field, by notification in the Official Gazette, make suitable changes in the said Schedule [Sec.41-F (2)]. Workers participation in safety management (Sec. 41-G). Appointment of Safety Committee - The occupier shall, in every factory where a hazardous process takes place, or where hazardous substances are used or handled, set up a Safety Committee. The Committee shall consist of equal number of representatives of workers and management to promote co-operation between the workers and the management in maintaining proper safety and health at work. It shall review periodically the measures taken in that behalf [Sec. 41-G (1)]. Composition of the Safety Committee- The tenure of office of the members of the Safety Committee and their rights and duties shall such as may be prescribed [Sec.41-G (2). Exemption. The State Government may, by order in writing and for reasons to be recorded, exempt the occupier of any factory or class of factories from setting up the Safety Committee [Provision to Sec. 41-G (1)]. Right of workers to warn about imminent danger (Sec. 41-H) Apprehension of danger to be brought to notice. Sometimes the workers employed in a factory engaged in a hazardous process may have reasonable apprehension that there is a likelihood of imminent danger to their lives or health due to any accident. In such a case they may bring such danger to the notice of the occupier, agent, and manager or, any other person who is in charge of the factory or the process concerned
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directly or through their representatives in the Safety Committee. They may also simultaneously bring the danger to the notice of the Inspector [Sec.41-H (1)]. Duty of Occupier, etc - It shall be the duty of the occupier, agent, manager or the person in charge of the factory or process to take immediate remedial action if he is satisfied about the existence of such imminent danger and send report forthwith of the action taken to the nearest Inspector [Sec. 41-H (2)]. Reference of matter to Inspector - If the occupier, agent, manager or the person in charge is not satisfied about the existence of any imminent danger as apprehended by the workers, he shall, nevertheless, refer the matter forthwith to the nearest Inspector. The decision of the Inspector on the question of the existence of such imminent danger shall be final [Sec. 41-H (3)]. Penalty for contravention of the provisions of Section 41-B, 41-C and 41-H [New Sec. 96-A as introduced by the Amendment Act of 1987] Whoever fails to comply with or contravenes any of the provisions of Secs. 41-B, 41-C or 41-H or the rules made there under shall, in respect of such failure or contravention is punishable with imprisonment for a term which may extend to 7 years and with fine which may extend to Rs.2, 00,000. In case the failure or contravention continues, the defaulter shall be punishable with additional fine which may extend to Rs.5,000 for every day during which such failure or contravention continues after the conviction for the first such failure or contravention [Sec. 96-A(1)]. If this failure or contravention continues beyond a period of 1 year after the date of conviction, the offender shall be punishable with imprisonment for a term which may extend to 10 years [Sec. 96-A (2)]. III-Welfare Chapter V (Sec.42 to 50) of the act deals with facilities for the welfare of workers. The various provisions in this regard are as follows: 1. Washing facilities (Sec 42) - In every factory (a) adequate and suitable facilities (separately and adequately screened for the use of male and female worker s) shall be provided and maintained for the use of the workers therein; and (b) such facilities shall be conveniently accessible and shall be kept clean, 2. Facilities for storing and drying clothing (Sec. 43)- The State Government may make rules requiring the provision of suitable places for keeping clothing of workers not worn during working hours and for the drying of wet clothing in respect of any factory or class of factories. 3. Facilities for sitting (Sec. 44) (1) Provision of sitting arrangement for workers obliged to work in a standing position. In every factory, suitable arrangements for sitting shall be provided and maintained for all workers who are obliged to work in a standing position. This has been done in order that the workers may take advantage of any opportunities for rest which may occur in the course of their work [Sec. 44(1)].
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2) Provision of seating arrangement for workers doing work which can be done in a sitting position. If the workers in any factory engaged in a particular manufacturing process or working in a particular room are able to do their work efficiently in a sitting position, the Chief Inspector may require the occupier of the factory to provide such seating arrangements as may be practicable [Sec. 44(2)]. 3) Exemption. The State Government may, by notification in the Official Gazette, exempt any factory or class of factories or manufacturing process from the application of the provisions of sec. 44 [Sec.44(3)]. 4. First-aid appliances [Sec. 45] (1) At least one first aid box with prescribed contents for every 150 workers. There shall in every factory be provided and maintained so as to be readily accessible during all working hours, first-aid boxes or cupboards with the prescribed contents. There shall be at least one such box for every 150 workers ordinarily employed at any one time in the factory [Sec. 45(1)]. 2) First Aid box to have prescribed contents. Only the prescribed contents shall be kept in a first aid box or cupboard [Sec.45 (2)]. 3) First aid box to be in the charge of responsible person. Each first aid box or cupboard shall be kept in the charge of a separate responsible person who holds a certificate in the first aid treatment recognized by the State Government. Further, such person shall always be readily available during the working hours of the factory [Sec. 45(3)]. 4) Ambulance room in a factory employing more than 500 workers. In every factory wherein more than 500 workers are ordinarily employed there shall be provided and maintained an ambulance room containing the prescribed equipment. The room shall be in the charge of such medical and nursing staff as may be prescribed and those facilities shall always be made readily available during the working hours of the factory [Sec. 45(4)]. 5. Canteens [Sec. 46(1) Canteen in factory employing more than 250 workers-the State Government may make rules. 1. The State Government may make rules requiring that in any specified factory wherein more than 250 workers are ordinarily employed, a canteen or canteens shall be provided and maintained by the occupier for the use of the workers (Sec. 46(1)]. 2) Provisions in rules. The rules made by the State Government as to canteens may provide for (a) the date by which canteen shall be provided, (b) the standards in respect of construction, accommodation, furniture and other equipment of the canteen, (c) the foodstuffs to be served therein and the charges which may be made thereon, (d) the constitution of a managing committee for the canteen and representation of the workers in the management of the canteen, (e) the items of expenditure in the running of the canteen which are not to be taken into account in fixing the cost of foodstuffs and which shall be borne by the employer, and (f) the delegation to the Chief Inspector, subject to such conditions
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as may be prescribed, of the power to make rules under Clause (c) [Sec. 46(2)]. 6. Shelters, rest rooms and lunch rooms [Sec. 47] (1) Provision for shelters, rest rooms, lunch rooms in factories employing more than 150 workers. In every factory wherein more than 150 workers are ordinarily employed, there shall be a provision for shelters, rest rooms and a suitable lunch room where workers can eat meals brought by them with provision for drinking water. However, any canteen maintained in accordance with the provisions of Sec. 46 shall be regarded as part of this requirement. Where a lunch room exists, no worker shall eat any food in the workroom [Sec.47 {1)]. (2) Shelters etc. to be sufficiently lighted ventilated and cooled. The shelters or rest room or lunch rooms shall be sufficiently lighted and ventilated and shall be maintained in a cool and clean condition [Sec. 47 (2)]. 7. Crches (Sec.48). 1) Provision of crches in factories employing more than 30 women workers. In every factory wherein more than 30 women workers are ordinarily employed, there shall be provided and maintained a suitable room or rooms for use of children under the age of 6 years of such women [Sec.48 (1)]. 2) Crches to be adequately lighted and ventilated and to be under the charge of trained women. Rooms for use of children shall provide adequate accommodation, shall be adequately lighted and ventilated. Further they shall be maintained in a clean and sanitary condition and shall be under the charge of women trained in the care of children and infants [Sec. 48 (2)]. 3) Prescription of rules by the State Government. The State Government may make rules prescribing the location and the standards in respect of construction, accommodation, furniture and other equipment of rooms for use of children. it may also make rules for the provision of additional facilities for the care of children beExtendeding to women workers, including suitable provision of facilities (a) for washing and changing their clothing, (b) of free milk or refreshment or both for the children, and (c) for the mothers of children to feed them at the necessary intervals [Sec.48 (3)]. 8. Welfare Officers (Sec.49). (1) Employment of welfare officers in factories employing more than 500 or more workers. In every factory wherein 500 or more workers are ordinarily employed the occupier shall employ in the factory such number of welfare officers as may be prescribed [Sec. 49 (1)]. 2) Duties, qualifications and conditions of service to be prescribed by the State Government. The State Government may prescribe the duties, qualifications and conditions of service of welfare officers [Sec. 49 (2)]. Even if a factory (say, a sugar factory) employs over 500 workers only for a few months in the year and not continuously, the occupier shall employ the prescribed number of welfare officers [EmployersAssn. of Northern India v. Secretary of Labour, A.I.R. (1952) All. 109].
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Power to make rules (Sec. 50). The State Government may make rules a) exempting subject to compliance with such alternative arrangements for the welfare of workers as may be prescribed, any factory or class or description of factories from compliance with any of the provisions of Secs. 42 to 49; b) requiring in any factory or class or description of factories that representatives of the workers employed in the factory shall be associated with the management of the welfare arrangements of the workers. 3.1.8 Working Hours Working Hours of Adults The rules as to the regulation of hours of work of adult workers in a factory and holidays are as follows: 1) Weekly hours (Sec. 51). No adult worker shall be required or allowed to work in a factory for more than 48 hours in any week. 2) Daily hours (Sec. 54). Subject to the above rule as contained in (Sec. 51) no adult worker shall be required or allowed to work in a factory for more than 9 hours in any day. But in order to facilitate the change of shift, this limit may be exceeded. This can, however, be done with the previous approval of the Chief Inspector of Factories. 3. Intervals for rest (Sec. 55). The periods of work of adult workers in a factory each day shall be so fixed that no period shall exceed 5 hours. Further no worker shall work for more than 5 hours before he has an interval for rest of at least half an hour (Sec. 55 (1)]. The State Government or Chief Inspector may, by written order and for the reasons specified therein, exempt any factory from the provisions of Sec. 55 (1). But in that case also, the total number of hours worked without an interval shall not exceed 6 [Sec. 55 (2)]. Spread over, night shifts and overlapping shifts. Spread over (Sec.56). The periods of work of an adult worker in a factory shall be so arranged that inclusive of his intervals for rest, they shall not spread over more than 10-1/2 hours in any day. But the Chief Inspector may for reasons to be specified in writing increase the spread over up to 12 hours. Night Shifts (Sec. 57). Where a worker in a factory works on a shift which extends beyond midnight: a) his weekly or compensatory holiday for a whole day means a period of 24 consecutive hours beginning when his shift ends b) the following day for him shall be deemed to be the period of 24 hours beginning when such shift ends, and the hours he has worked after midnight shall be counted in the previous day. Prohibition of overlapping shifts (Sec. 58). Work shall not be carried on in any factory by means of a system of shifts so arranged that more than one relay of workers is engaged in work of the same kind at the same time [Sec. 58 (1)].
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The State Government or the Chief Inspector may, by written order and for the reasons specified therein, grant exemption to any factory or class or description of factories or any department or section of a factory from the provisions of Sec. 58 (1) [Sec. 58 (2)]. Extra wages for overtime (Sec. 59). 1) Wages at twice the ordinary rate. Where a worker works in a factory for more than 9 hours in any day or more than 48 hours in any week, he shall in respect of overtime work be entitled to wages at the rate of twice his ordinary rate of wages [Sec. 59 (1)]. 2) Ordinary rate of wages. It means the basic wages plus such allowances, including the cash equivalent of the advantage accruing through the concessional sale of workers of food grains and other articles, as the worker is for the time being entitled to. It does not include a bonus and wages for overtime work (Sec.59 (2)]. 3) Workers paid on piece rate basis. The time rate in case of workers paid on piece rate shall be deemed to be equivalent to the daily average of their full time earnings for the days on which they actually worked on the same or identical job during the month immediately preceding the calendar month during which the overtime work was done and such time rates shall be deemed to be the ordinary rates of wages of those workers [Sec. 59 (3)]. But in the case of a worker who has not worked in the immediately preceding calendar month on the same or identical job, the time rate shall be deemed to be equivalent to the daily average of the earnings of the worker for the days on which he actually worked in the week in which the overtime work was done [Provision to Sec. 59 (3)]. 4) Cash equivalent of the concessional sale of food grains and other articles. It shall be computed as often as prescribed on the basis of the maximum quantity of food grains and other articles admissible to a standard family. Standard family means a family consisting of the worker, his or her spouse and 2 children below the age of 14 years requiring in all 3 adult consumption units. Adult consumption unit means the consumption unit of a male above the age of 14 years. The consumption unit of a female above the age of 14 years and that of a child below the age of 14 years shall be calculated at the rate of 0.8 and 0.6 respectively of one adult consumption unit [Sec. 59 (4)]. 5) Rule-making power of the State Government. The State Government may make rules prescribing (a) the manner in which the cash equivalent of the advantage accruing through the concessional sale to a worker of food grains and other articles shall be computed, and (b) the registers that shall be maintained in a factory for the purpose of securing compliance with the provisions of Sec.59 [Sec. 59 (5)]. Restriction on double employment (Sec. 60) - No adult worker shall be required or allowed to work in any factory on any day on which he has already been working in any other factory save in such circumstances as may be prescribed.
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Notice of periods of work for adult workers (Sec.61) 1) Notice to be displayed at some conspicuous place : A notice of periods of work for adult workers shall be displayed and correctly maintained in every factory. It shall show clearly for every day the periods during which adult workers may be required to work [Sec. 61 (1)]. The notice shall be in English and in a language understood by the majority of the workers in the factory. It shall be displayed at some conspicuous and convenient place at or near the main entrance to the factory and shall be maintained in a clean and legible condition [Sec. 108 (2)]. 2) Periods to be fixed beforehand : (a) The periods shown in the notice shall be fixed beforehand and shall not contravene the provisions of weekly and daily hours, weekly holidays, intervals for rest, spread over and prohibition of overlapping shifts [Sec.61 (2)]. b) Where all the adult workers in a factory are required to work during the same period, the manager shall fix generally the periods [Sec. 61 (3)]. 3) Classification of workers : (a) Where all the adult workers in a factory are not required to work during the same periods, the manager of the factory shall classify them into groups according to the nature of their work indicating the number of workers in each group [Sec. 61 (4)]. b) For each group which is not required to work on a system of shifts, the manger of the factory shall fix the periods during which the group may be required to work [Sec.61 (5)]. 4) Groups working on a system of shifts : (a) Where any group is required to work on a system of shifts and the relays are not to be subject to predetermined periodical changes of shift, the manger shall fix the periods during which each relay of the group may be required to work [Sec. 61 (6)]. b) Where any group is to work on a system of shifts and the relays are subject to predetermined periodical changes of shifts, the manager shall draw up a scheme of shifts. This provision has been made so that the periods during which any relay of the group may be required to work and the relay which will be working at any time of the day may be ascertained for any day [Sec. 61 (7)]. 5) Form of notice of periods of work : The State Government may prescribe forms of the notice of periods of work for adults and the manner in which it shall be maintained [Sec. 61 (8)]. 6) Copy of notice in duplicate and any change to be sent to Inspector : (a) A copy of the notice shall be sent in duplicate to the Inspector before the day on which work is begun in the factory [Sec. 61 (9)]. b) Any proposed changes in the system of work in any factory which will necessitate a change in the notice shall be notified to the Inspector in duplicate before the change is made. Further, except with the previous sanction of the Inspector, no such change shall be made until 1 week has elapsed since the last change [Sec. 61 (10)].
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Register of adult workers (Sec. 62 and 63) The manager of every factory shall maintain a register of adult workers showing (a) the name of each adult worker in the factory (b) the nature of his work (c) the group, if any, in which he is included (d) where his group works on shifts, the relay to which he is allotted and (e) such other particulars as may be prescribed. The register shall be available to the Inspector at all times during working hours, or when any work is being carried on in the factory. If the Inspector is of opinion that any muster-roll or register maintained as part of the routine of a factory gives the above particulars in respect of workers, he may direct that such muster-roll or register shall be treated as the register of adult workers in that factory. [Sec. 62 (1)]. No adult worker shall be required or allowed to work in any factory unless his name and other particulars have been entered in the register of adult workers [Sec. 62(1-A)]. The State Government may prescribe the form of the register of adult workers, the manner in which it shall be maintained and the period for which it shall be preserved [Sec. 62 (2)]. Further no adult worker shall be required or allowed to work in any factory otherwise than in accordance with the notice of periods of work for adults displayed in the factory and the entries made beforehand against his name in the register of adult workers of the factory (Sec. 63). Holidays Weekly holidays (Sec. 52). Every adult worker in a factory shall be allowed a holiday during a week. As such no adult worker shall be required or allowed to work in factory on the first day of the week which is a Sunday. But the manager can substitute for Sunday any of the 3 days preceding or following it. He shall, however, deliver a notice at the office of the Inspector of his intention to require the worker to work on that day. Such notice shall also be displayed in the factory. No substitution can, however, be made which results in any worker working for more than 10 days consecutively without a holiday for a whole day [Sec. 52 (1)]. Where any worker works on a Sunday and has had a holiday on one of the 3 days immediately before it, Sunday shall, for the purpose of calculating his weekly hours of work, be included in the preceding week [Sec. 52 (3)]. Compensatory holidays (Sec. 53). Where a worker is deprived of any of the weekly holidays under Sec. 52 or by any of the rules made by the State Government exempting a factory from the provisions of Sec. 52, he shall be allowed compensatory holidays of equal number to the holidays so lost. Such compensatory holidays shall be allowed within the month in which the holidays were due to the workman or within 2
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months immediately following that month [Sec. 53 (1)]. The State Government may prescribe the manner in which the compensatory holidays shall be allowed [Sec. 53 (2)]. Further restrictions on employment of women (Sec. 66). These are discussed later in this chapter under the heading Employment of Women. Employment of Young Persons: Prohibition of employment of young children (Sec. 67). No child who has not completed his 14th year shall be required or allowed to work in a factory. Non-adult workers to carry tokens (Sec. 68). A child who has completed his 14th year or an adolescent may be allowed to work in a factory if: a) a certificate of fitness for such work is in the custody of the manager of the factory; and b) such child or adolescent carries, while he is at work, a token giving a reference to such certificate. A provision is made for a certificate of fitness under Sec.69. Such a certificate entitles a young person who has completed his 14th hear to work in a factory as a child. But if the young person has completed his 15th hear, the certificate of fitness entitles him to work in a factory as an adult. Certificate of fitness [Sec. 69] - It is a certificate granted to a young person by a certifying surgeon after examining him and ascertained his fitness for work in a factory. An application for such examination may be made by the young person himself or by his guardian. It shall however, be accompanied by a document signed by the manager of the factory that such person will be employed therein if certified to be fit for work in a factory. The manager of the factory may also apply for such examination of the young person. The certifying surgeon shall examine the place of work and the manufacturing process before granting a certificate unless he has the personal knowledge of it [Sec. 69 (1)]. Certificate of fitness to entitle a young person to work as a child or adult - The certifying surgeon, after examination, may grant to a young person or may renew a certificate of fitness to work in a factory as: a) a child, if he is satisfied (i) that the young person has completed his 14th year, (ii) that he has attained the prescribed physical standards, and (iii) that he is fit for such work; b) an adult, if he is satisfied (i) that the young person has completed his 15th year, and (ii) that he is fit for a full days work in a factory [Sec. 69 (2)]. Certificate valid for 12 months- A certificate of fitness granted or renewed is valid for 12 months from the date of issue, but it can be renewed is valid for 12 months from the date of issue, but it can be renewed. It may be issued subject to conditions in regard to the nature of the work in
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which the young person may be employed, or requiring re-examination of the young person before the expiry of the period of 12 months [Sec. 69 (3)]. Revocation of certificate of fitness- A certificate of fitness can be revoked any time by the certifying surgeon if the holder of it is not fit to work in the capacity stated therein in a factory [Sec. 69 (4)]. Where a certifying surgeon refuses to grant or renew a certificate of fitness, or revokes a certificate, he shall, if so requested, state his reasons in writing for so doing [Sec. 69 (5)]. Fees payable by the employer- Fees for a certificate of fitness or its renewal shall be payable by the occupier and shall not be recoverable from the young person, his parents or guardian [Sec. 69 (7)]. Effect of certificate of fitness (Sec. 70) - An adolescent who has been granted a certificate of fitness to work in a factory as an adult and who carries a token giving reference to the certificate shall be deemed to be an adult for the purposes of hours of work of an adult and the annual leave [Sec. 70 (1)]. No female adolescent or a male adolescent who has not attained the age of 17 years but who has been granted a certificate of fitness to work in a factory as an adult shall be required or allowed to work in any factory except between 6 A.M. and 7 P.M. [Sec. 70 (1-A), as introduced by the Amendment Act of 1987]. The State Government may, by notification in the official gazette, in respect of any factory or group or class or description of factories: i) vary the limits laid down in Sec. 70 (1-A), but no female adolescent can be employed between 10 P.M. and 5 A.M;
ii) grant exemption from the provisions of Sec. 70 (1-A) in case of serious emergency where national interest is involved [Proviso to Sec. 70 (1-A)]. An adolescent who has not been granted a certificate of fitness to work in a factory as an adult is deemed to be a child for all the purposes of the Factories Act, [Sec. 70 (2): Jhunjhunwala v. B.K. Patnaik, (1964) 2 L.L.J. 551]. 3.1.8 Working hours (Sec. 71 and 72). 1) Working hours limited to 4-1/2. No child shall be employed or permitted to work in a factory: a) for more than 4-1/2 hours in a day; b) during the night [Sec. 71 (1)]. Night means a period of at least 12 consecutive hours which shall include the interval between 10 P.M. and 6 A.M. [Expl. to Sec. 71 (1)]. 2) Period of work of children limited to 2 shifts. The period of work of all children employed in a factory shall be limited to 2 shifts. These shifts shall not overlap or spread over more than 5 hours each. Each child shall be employed in only one of the relays which shall not, except with the previous permission in writing of the Chief Inspector, be changed more frequently than once in a period of 30 days [Sec.71(2)].
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3) Child workers entitled to weekly holidays. The provisions of weekly holidays (Sec. 52) shall apply also to child workers and no exemption from these provisions may be granted in respect of any child [Sec. 71 (3)]. 4) Prohibition if the child worker has already been working in another factory. No child shall be required or allowed to work in any factory on any day on which he has already been working in another factory [Sec. 71 (4)]. 5) Female child to work only between 8 A.M. to 7 P.M. No female child shall be required or allowed to work in any factory except between 8 A.M. and 7 P.M. [Sec. 71 (5)] as introduced by the Amendment Act of 1987].
6) Display of notice of work of child workers. There shall be displayed and correctly maintained in every factory in which children are employed a notice of periods of work for children showing clearly for every day the periods during which children may be required or allowed to work [Sec. 72 (1)]. The provisions of Sec. 61(8), (9) and (10) (discussed earlier) also apply to the notice required under Sec. 72 (1) [Sec.72 (3)]. 7) Fixation of periods of work beforehand. The periods shown in the notice shall be fixed beforehand in accordance with the method laid down for adult workers [Sec.72 (2)]. 3.1.9 Register of child workers and women (Sec. 73). The manager of every factory in which children are employed shall maintain a register of child workers showing (a) the name of each child worker in the factory, (b) the nature of his work, (c) the group, if any, in which he is included, (d) where his group works on shifts, the relay to which he is allotted, and (e) the number of his certificate of fitness. The register shall be available to the Inspector at all times during working hours or when any work is being carried on in a factory [Sec. 73 (1)]. No child worker shall be required or allowed to work in any factory unless his name and other particulars have been entered in the register of child workers [Sec. 73 (1-A)]. The State Government may prescribe the form of register of child workers, the manner in which it shall be maintained and the period for which it shall be preserved [Sec. 73 (2)]. The hours of work of a child shall correspond with the notice of periods of work for children displayed in the factory and the entries made beforehand against his name in the register of child workers (Sec. 74). Power to require medical examination (Sec. 75) - An Inspector may direct the manager of a factory to have a person or young person medically examined by a certifying surgeon when he is of opinion: a) that the person working in the factory without a certificate of fitness is a young person, or b) that the young person working in the factory with a certificate of fitness is no Extendeder fit to work in the capacity stated in the certificate and
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that such a person shall not be employed or permitted to work in the factory until he has been examined and granted a certificate of fitness or a fresh certificate of fitness. Power to make rules. The State Government may make rules: a) prescribing the forms of certificates of fitness to be granted to the young persons and the procedure for their issue; b) prescribing the physical standards to be attained by children and adolescents working in factories; c) regulating the procedure of certifying surgeons and prescribing other duties which the certifying surgeons may be required to perform in connection with the employment of young persons in factories (Sec. 76). The provisions relating to the employment of young persons are in addition to, and not in derogation of, the provisions of the Employment of Children Act, 1931 (Sec.77). Safety provisions for young persons 1) Work on or near machinery in motion [Sec. 22 (2)]. 2) Employment of young persons or dangerous machines [Sec. 23 (1)]. 3) Prohibition of employment near cotton-openers (Sec. 27). Sections 22 (2), 23 (1), 27 have already been discussed in this Chapter. 4) Dangerous Operations [Sec. 87 (b)]. No young person shall be employed on any operation carried on in a factory which exposes the young person to a serious risk of bodily injury, poisoning or disease. Employment of Women All the provisions of the Factory Act regarding employment and work of adult male workers apply to adult female workers except the following provisions which apply to adult female workers only. 1) Work on or near machinery in motion [Sec. 22 (2)]. 2) Prohibition of employment near cotton-openers (Sec. 27). 3) Crches (Sec. 48). 4) Working hours (Sec. 51 and 54). A woman shall not be required or allowed to work in a factory for more than 48 hours in any week or 9 hours in any day. 5) Restriction on employment of women (Sec.66). A woman shall be required or allowed to work in a factory only between the hours of 6 A.M. and 7 P.M. The State Government may by notification in the Official Gazette in respect of any factory or group or class or description of factories, vary these limits. But no such variation shall authorize the employment of any woman between the hours of 10 P.M. and 5 A.M. Again there shall be no change of shifts in the case of women workers in a factory except after a weekly or any other holiday [Sec. 66 (1)]. The State Government may make rules providing for the exemption from the restrictions imposed by Sec. 66 (1) in case of women working in fish-curing or fish canning factories, where the employment of women
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beyond the specified hours is necessary to prevent damage to, or deterioration in, any raw material [Sec. 66 (2)]. The rules so made shall remain in force for not more than 3 years at a time [Sec.66 (3)]. 6) Effect of certificate of fitness granted to female adolescent [Sec. 70 (1-A)]. This has already been discussed. 7) Dangerous operations [Sec. 86 (b)]. Where the State Government is of opinion that any operation carried on in a factory exposes any person employed in it to a serious risk of bodily injury, poisoning or disease, it may make rules prohibiting or restricting the employment of women in that operation. 3.1.10 Annual Leave with Wages Sections 78 to 84 (Chapter VIII) provide for the grant of a certain period of leave with wages to workmen. Application of Chapter VIII (Sec. 78) According to Sec. 78, the provisions relating to annual leave with wages as contained in Chapter VIII (Sec. 78 to 84) of the Act shall not prejudice any rights of workers under any other law, award or agreement (including settlement) or contract of service. When such award, agreement (including settlement) or contract of service provide for a Extendeder annual leave with wages than under the provisions of Secs 79 to 82, the worker shall be entitled to such annual leave. But in relation to matters not provided for in such award, agreement or contract of service or matters which are provided for less favourably therein, the provisions of Secs. 79 to 82, so far as may be, shall apply [Sec. 78 (1)]. Further the provisions of Chapter VIII shall not apply to workers in any factory of any railway administered by the Government who are governed by leave rules approved by the Central Government [Sec. 78 (2)]. Rules relating to annual leave with wages 1) Leave entitlementOne day for 20/15 days of work performed in case of adult/child. Every worker who has worked for a period of 240 days or more in a factory during a calendar year shall be allowed during the subsequent calendar year leave with wages for a certain number of days. These days of leave shall be calculated at the rate of: i) if an adult, one day for every 20 days of work performed by him during the previous calendar year;
ii) if a child, one day for every 15 days of work performed by him during the previous calendar year [Sec.79 (1)]; The leave admissible under the above rule shall be exclusive of all holidays whether occurring during or at either end of the period of leave [Expl. 2 to Sec.79 (1)]. 2) Computation of period of 240 days. For computing the period 240 days, the days of lay-off, maternity leave to a female worker not exceeding 12 weeks, and the leave earned in the previous year shall be
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included in this period of 240 days, but he/she shall not earn leave for these days [Explanation 1 to Sec. 79 (1)]. A worker who is employed on any day after the first day of January shall be entitled to leave with wages at the rates laid down in Sec. 79 (1) if he has worked for 2/3rds of the total number of days in the remainder of the calendar year [Sec. 79 (2)]. 3) Discharge, dismissal, superannuation, death or quitting of employment. If a worker is discharged or dismissed from service or quits his employment or is superannuated or dies while in service, during the course of the calendar year, he or his heir or nominee, as the case may be, shall be entitled to wages. These wages shall be in lieu of the quantum of leave to which he was entitled calculated at the rates specified in Sec. 79 (1). He shall be entitled to these wages even if he had not worked for the entire period specified in Sec.79 (1) making him eligible to avail of such leave. The payment of wages shall be made: (i) where the worker is discharged or dismissed or quits employment, before the expiry of the second working day from the date of such discharge, dismissal or quitting; or (ii) where the worker is superannuated or dies while in service, before the expiry of 2 months from the date of such superannuation or death [Sec. 79 (2)]. 4) Treatment of fraction of leave. In calculating leave period, fraction of leave of half a day or more shall be treated as one full days leave, and fraction of less than half a day shall be omitted [Sec. 79 (4)]. 5) Treatment of un- availed leave. If a worker does not in any one calendar year take the whole of the leave allowed to him, any leave not taken by him shall be added to the leave to be allowed to him in the succeeding calendar year. But the total number of days of leave that may be carried forward to a succeeding year shall not exceed 30 in the case of an adult or 40 in the case of child. However, annual leave not allowed because of any scheme for leave in operation shall be carried forward without any limit [Sec. 79 (5)]. 6) Application for leave to be made in writing within a specified time. A worker may at any time apply for annual leave in writing to the manager of the factory at least 15 days before the date on which he wishes his leave to begin. In a public utility service the application shall likewise be made at least 30 days before the date on which the worker wishes his leave to begin. But the number of times the leave may be taken during any year shall not exceed 3 [Sec. 79 (6)]. 7) Application for leave covering a period of illness may not be made within the specified time. If a worker wants to avail himself of the leave with wages due to him to cover a period of illness, he shall be granted such leave even if the application for leave is not made within the time specified. In such a case, advance payment of wages (as admissible under Sec.81) shall be made not later than 15 days, or in the case of a public utility service not later than 30 days, from the date of the application for leave [Sec. 79 (7)].
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8) Scheme for the grant of leave. For the purpose of ensuring the continuity of work, the occupier or the manager of the factory, in agreement with the Works Committee (constituted under Sec.3 of the Industrial Disputes Act, 1947 in an industrial establishment in which 100 or more workmen are employed), if any, or the representatives of workers, may draw up and lodge with the Chief Inspector a scheme for regulating the grant of leave [Sec. 79 (8)]. 9) Display of the scheme for grant of leave. The scheme shall be displayed at some convenient and conspicuous places in the factory. It shall be in force in the first instance for 12 months, and may be renewed for a further period of 12 months at a time. A notice of renewal shall be sent to the Chief Inspector before it is renewed [Sec. 79 (9)]. 10) Refusal of leave to be in accordance with scheme. An application for leave submitted in proper time shall not be refused, unless refusal is in accordance with the scheme for leave for the time being in operation [Sec. 79 (10)]. 11) Payment of wages to worker for leave period if he is discharged or if he quits service. If a worker is being entitled to leave according to the rules, is discharged, or if having applied for is refused leave and quits service before he has taken the leave, he shall be paid wages in respect of the leave not taken. The payment shall be made before the expiry of the second working day after discharge or on or before the next payday in case the worker quits his employment [Sec. 79 (11)]. 12) Un availed leave not to be taken into account while computing period of notice. The un availed leave of a worker shall not be taken into consideration in computing the period of any notice required to be given before discharge or dismissal [Sec. 79 (12)]. Wages during leave period (Sec. 80). For the leave allowed to a worker he shall be entitled to wages at a rate equal to the daily average of his total full time earnings for the days on which he actually worked during the month immediately preceding his leave. The full time earnings shall be exclusive of any overtime and bonus but inclusive of dearness allowance and the cash equivalent of the advantage accruing through the concessional sale to the worker of food grains and other article [Sec. 80 (1)]. In the case of worker who has not worked on any day during the calendar month immediately preceding his leave, he shall be paid at a rate equal to the daily average of his total full time earnings for the days on which he actually worked during the last calendar month preceding his leave in which he actually worked. These full time earnings shall be exclusive of any overtime wages and bonus but inclusive of dearness allowance and the cash equivalent of the advantage accruing through the concessional sale to the workers of food grains and other articles [Proviso to Sec. 80 (1) as added by the Amendment Act of 1987]. The calculation of cash equivalent of advantage accruing through the concessional sale to the worker of food grains and other articles shall be calculated in the same manner as laid down in Sec. 59 (4) explained in connection with Extra wages for overtime [Sec. 80 (2)].
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The State Government may make rules prescribinga) the manner in which the cash equivalent of the advantage accruing through the concessional sale to a worker of food grains and other articles shall be computed; and b) the register that shall be maintained in a factory for the purpose of compliance with the provisions of Sec. 80 [Sec. 80 (3)]. Other provisions of Chapter VIII Payment in advance in certain cases (Sec. 81). A worker who has been allowed leave for not less than 4 days, in case of an adult, and 5 days, in the case of a child, shall, before his leave begins, be paid the wages due for the period of the leave allowed. Mode of recovery of unpaid wages (Sec 82). Any such required to be paid by an employer as wages but not paid by him shall be recoverable as delayed wages under the provisions of the Payment of Wages Act, 1936. Power to make rules (Sec. 83). The State Government may make rules directing managers of factories to keep registers containing prescribed particulars and requiring the registers to be available for examination by Inspectors. Power to exempt factories (Sec. 84). The State Government may exempt a factory from the operation of the leave rules if it is satisfied that its own leave rules provide benefits which are not less favourable to the workers than the statutory leave rules. Power to apply the Act to certain premises (Sec. 85). The State Government may, by notification in the Official Gazette, declare that all or any of the provisions of the Factories Act shall apply to any place wherein a manufacturing process is carried on with or without the aid of power or is so ordinarily carried on. This provision may be made applicable ever wherei) the number of persons employed in the place of work is less than 10 if working with the aid of power, and less than 20, if working without the aid of power, or
ii) the persons working in the place of work are not employed by the owner thereof but are working with the permission of, or under agreement with such owner. If the manufacturing process is being carried on by the owner only with the aid of his family, the above provision shall not apply [Sec. 85 (1)]. After a place is so declared under Sec. 85 (1), it shall be deemed to be a factory for the purposes of the Act and the owner shall be deemed to be the occupier and any person working therein, a worker [Sec. 85 (2)]. Power to exempt public institutions (Sec. 86). The State Government may exempt, subject to necessary conditions, any workshop or
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workplace where a manufacturing process is carried on and which is attached to a public institution maintained for the purposes of education, training, research or reformation, from all or any of the provisions of the Factories Act. This shall, however, be subject to a scheme for the regulation of hours of work, intervals for meals and holidays, to be prepared by the person having the control of the institution and to be submitted to the State Government for its approval. If the State Government is satisfied that the provisions of the scheme are not less favourable than the corresponding provisions of this Act, the exemption shall be granted from the provisions of work and holidays. Dangerous operations (Sec. 87). A manufacturing process or operation carried on in a factory might expose any person employed in it to a serious risk of bodily injury, poisoning or disease. The State Government may make rules applicable to any such factory or class or description of factories in which the manufacturing process or operation is carried on: a) specifying the manufacturing process or operation and declaring it to be dangerous; b) prohibiting or restricting the employment of women, adolescents or children in the manufacturing process or operation; c) providing for the periodical medical examination of persons employed, or seeking to be employed, in the manufacturing process or operation and prohibiting the employment of persons not certified as fit for such employment and requiring the payment by the occupier of the factory of fees for such medical examination; d) providing for the protection of all persons employed in the manufacturing process or operation or in the vicinity of the places where it is carried on; e) prohibiting, restricting or controlling the use of any specified materials or processes in connection with the manufacturing process or operation; and f) requiring the provision of additional welfare amenities and sanitary facilities and the supply of protective equipment and clothing, and laying down the standards thereof, having regard to the dangerous nature of the manufacturing process or operation. Power to prohibit employment on account of serious hazard (Sec. 87-A as introduced by the Amendment Act of 1987). Sometimes it may appear to the Inspector that conditions in a factory or part thereof are such that they may cause serious hazard by way of injury or death to the persons employed therein or to the general public in the vicinity. In such a case, he may, by order in writing to the occupier of the factory, state the particulars in respect of which he considers the factory of part thereof to be the cause of such serious hazard. He may further prohibit such occupier from employing any person in the factory or any part thereof other than the minimum number of persons necessary to attend to the minimum tasks till the hazard is removed [Sec. 87-A (1)]. The order so issued by the Inspector shall have effect
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for a period of 3 days until extended by the Chief Inspector by a subsequent order [Sec. 87 A (2)]. Any person aggrieved by an order of the Inspector and the Chief Inspector, as the case may be, shall have the right to appear to the High Court [Sec. 87 A (3)]. Any person whose employment has been affected by an order issued by the Inspector shall be entitled to wages and other benefits. Further it shall be the duty of the occupier to provide alternative employment to the person so affected wherever possible and in the manner prescribed [Sec. 87 A (4)]. This provision shall however be without prejudice to the rights of the parties under the Industrial Dispute Act, 1947 [Sec. 87 A (5)]. Notice of certain accidents (Sec. 88). Where in any factory an accident occurs which causes death, or which causes any bodily injury by reason of which the person injured is prevented from working for a period of 48 hours or more immediately following the accident, the manager of the factory shall send notice thereof to such authorities, and in such form and within such time, as may be prescribed [Sec. 88 (1)]. Where a notice given under Sec. 88 (1) relates to an accident causing death, the authority to whom the notice sent shall make an inquiry into the occurrence within 1 month of the receipt of the notice. If such authority is not the Inspector, it shall cause the Inspector to make an inquiry within this period [Sec. 88 (2)]. Notice of certain dangerous occurrences (Sec. 88 A). Where, in a factory, any dangerous occurrence of such nature as may be prescribed occurs, whether causing any bodily injury or disability or not, the manager of the factory shall send notice thereof to such authorities, and in such form and within such time, as may prescribed. Power to direct inquiry into cases of accident or disease (Sec. 90). The State Government may appoint a competent person to inquire into the causes of any accident occurring in a factory or into any case where a disease specified in the Third Schedule to the Act has been, or is suspected to have been, contracted in a factory. It may also appoint one or more persons possessing legal or special knowledge to act as assessors in such inquiry [Sec. 90 (1)]. The person appointed to hold an inquiry under Sec. 90 shall have the powers of a Civil Court and also of an Inspector under the Act [Sec. 90 (2)]. The person holding an inquiry under Sec. 90 shall make a report to the State Government stating the causes of the accident, or as the case may be, disease and any attendant circumstances. He shall also add any observations which he or any of the assessors may think fit to make [Sec. 90 (3)]. The State Government may, if it thinks fit, cause to be published any report made under Sec. 90 or any extracts there from [Sec. 90 (4)].
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3.1.11 Penalties and Procedure Sections 92 to 106 (Chapter X) provide for penalties for certain offences and procedural matters. The Amendment Act of 1987 has considerably enhanced these penalties so that they serve as a deterrent for the commission of offences. General penalty for offences (Sec. 92). If in any factory there is any contravention of any of the provisions of the Act or of any rules made there under, the occupier and the manager of the factory shall each be guilty of an offence and punishable with imprisonment for a term up to 2 years or with fine up to Rs. 1, 00,000 or with both. If the contravention is continued after conviction, they shall be punishable with a further fine, which may extend to Rs. 1,000 for each day on which the contravention is so continued. This is subject to other express provision in the Act and Sec. 93 (which deals with liability of owner of premises in certain circumstances). Where the contravention of any of the provisions of Chapter IV (dealing with safety) or any rule made there under or under Sec. 87 (dealing with dangerous operations) has resulted in an accident causing death or serious bodily injury, the fine shall not be less than Rs. 25,000 in the case of an accident causing serious bodily injury (Proviso to Sec. 92). Serious bodily injury means an injury which involves, or in all probability will involve, the permanent loss of the use of , or permanent injury to, any limb or the permanent loss of, or injury to, sight or hearing, or the facture of any bone. It does not include the facture of bone or joint (not being fracture of more than one bone or joint) of any phalanges of the hand or foot [Explanation to Sec. 92]. Enhanced penalty after conviction (Sec. 94). If any person who has been convicted of any offence punishable under Sec. 92 is again guilty of an offence involving a contravention of the same provision, he shall be punishable on a subsequent conviction with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs.10, 000 but which may extend to Rs.2, 00,000 or with both. But the Court may for any adequate and special reasons to be mentioned in the judgment, impose a fine of less than Rs.10, 000. Where, however, the contravention of any of the provisions of Chapter IV (dealing with safety) or any rules made there under or under Sec. 87 (dealing with dangerous operations) has resulted in an accident causing death or serious bodily injury, the fine shall not be less than Rs.35, 000 in the case of an accident causing death and Rs.10, 000 in the case of an accident causing serious bodily injury [Sec. 94 (1)]. No cognizance shall be taken of any conviction made more than 2 years before the commission of the offence for which the person is subsequently being convicted [Sec. 94 (2)]. Cognizance of Offences (Sec. 105). No Court shall take cognizance of any offence under this Act except on a complaint by, or with the
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previous sanction in writing of an Inspector [Sec. 105 (1)]. Further, no Court below that of a Presidency Magistrate or a Magistrate of the first class shall try any offence punishable under the Act [Sec. 105 (2)]. The complaint must be filled within 3 months of the date on which the alleged commission of the offence comes to the knowledge of an Inspector. But where the offence consists of disobeying a written order made by an Inspector, complaint thereof may be made within 6 months of the date on which the offence will alleged to have been committed (Sec. 106). The explanation to Sec. 106 lays down the procedure for the computation of the period of limitation. Appeals (Sec. 107). The manager of the factory on whom an order in writing by an Inspector has been served under the provisions of this Act or the occupier of the factory may, within 30 days of service of the order, appeal against it to the prescribed authority. Such authority may, subject to rules made in this behalf by the State Government, confirm, modify or reverse the order. Display of notices (Sec. 108). In addition to the notices required to be displayed in any factory by or under this Act, there shall be displayed in every factory a notice containing such abstracts of this Act and of the rules made there under as may be prescribed and also the name and address of the Inspector and the certifying surgeon [Sec. 108 (1)]. The notices shall be in English and in a language understood by the majority of the workers in the factory. They shall be displayed at some conspicuous and convenient place at or near the main entrance to the factory, and shall be maintained in clean and legible condition [Sec. 108 (2)]. The Chief Inspector may, by order in writing served on the manager of the factory, require the display of posters relating to the health, safety and welfare of workers [Sec. 108 (3)]. Returns (Sec. 110). The State Government may make rules requiring owners, occupiers or managers of factories to submit such returns, occasional or periodical, as may in its opinion be required. Power to make rules and give directions (Secs. 112, 113, and 115). The State Government may make rules providing for any matter which may be considered expedient in order to give effect to the purposes of the Act (Sec. 112). The Central Government may also give directions to a State Government as to the carrying into execution of the provisions of the Act (Sec. 113). Sec. 115 provides for the publication of rules made under t6he Act in the Official Gazette. Restriction on disclosure of information (new Sec. 118 A) as introduced by the Amendment Act of 1987). Every Inspector shall treat as confidential the source of any complaint brought to his notice on the breach of any provision of this Act [Sec. 118-A (1)]. Further, he shall not, while making any inspection under this Act, disclose to the Occupier, manager or his representative that the inspection is made in pursuance of the receipt of a complaint. This rule shall not apply to any case in which the person who has made the complaint has consented to disclose his name [Sec. 118 A (2)].
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Have you understood ? I-Objective Questions : 1. If a person completes______________years of age he is called as adult. a. 20 b. 21 c. 18 d. 19 2. Adolescent is a person who has completed _______of age but not completed his ________ year. a. 14, 17 b. 15, 18 c. 20, 21 d. 13,17 b. Joint chief inspectors d. Inspectors 3. In the hierarchy of the Inspecting staff who is the third level _________. a. Additional chief inspectors c. Deputy chief inspectors
4. No adult worker shall be allowed to work in a factory for more than ____________ hours in any week. a. 45 Answers 1. d 2. b 3. c. 4.b b. 48 c. 47 d. 46
Short Questions : 5. 6. 7. 8. List the powers of Inspectors of factories. Explain the general duties of occupier. Who is a certifying surgeon? Write short note on overcrowding.
Extended Questions : 9. Discuss the procedure relating to approval, licensing and registration of factories. 10. Describe the provisions relating to Health, Safety and Welfare of employees. 11. What are the provisions relating to the working hours of women and children. 12. Explain the provision of annual leave with wages. Summary The Factories Act paves a way for proper functioning of the factories. The original regulations and the notified amendments guide the employers and help to understand the formalities of approval, licensing and registration of factories. The Inspecting staff roles and responsibilities are also clearly mentioned in the Act. Factories Act describe the details relating to provisions of Health, Safety and Welfare of employees and the liabilities of the employers. The working hours of the adult, women and children are also notified in the Act. The eligibility to the annual leave with wages is clearly explained.
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3.2
The Payment of Wages Act 1936
3.2.1 Introduction of the Payment of Wages Act, 1936 In a country where even living wages are not paid to workers, the need to protect the wages earned by them can hardly be over emphasized. Before the Payment of Wages Act, 1936 was passed, evils of withholding wages, delays in paying wages and making unreasonable deductions out of wages were quite prevalent. The Payment of Wages Act, 1936 was passed to regulate the payment of wages to certain classes of persons employed in industry [DCosta, A.V.G.I.P.Rly. V. B.C.Patel, A.I.R.(1955) S.C.412). It is essentially meant for the benefit of industrial employees not getting very high salaries and the provisions of the Act were enacted to safeguard their interest (Milkhi Ram v. State of Punjab. A.I.R. (1964) Punj.513). It also provides against irregularities in payment of wages and unauthorized deductions therefrom by the employers (Arvind Mills Ltd. V. Gadgil, A.I.R. (1941) Bom.26: Arumugham v. Jawahar Mills, A.I.R. (1956) Mad. 79). Further it ensures payment of wages in a particular form and at regular intervals, without unauthorized deductions. Extent of the Act The Act extends to the whole of India (Sec. 1 (2). It was extended to Jammu and Kashmir by the Central Labour Laws (Extension to Jammu and Kashmir) Act, 1970. 3.2.2 Learning Objectives After studying this unit you should be able to: Understand the definition of wages. Determine the objectives and application of the Act. Explore the rules of the Wages Act. Know the provisions of deductions from wages. Study the maintenance of registers and records. Know the method and procedure of enforcement of the Wages Act. Determine the claims arising out of the deductions from the wages. 3.2.3 Application of the Act The Act applies to the payment of wages to persons employed in any factory, to persons employed (otherwise than in a factory) upon any railway by a railway administration and to an industrial or other; establishment specified in Clauses (a) to (g) of sec. 2 (i) (which defines industrial or other establishment). The persons employed upon a railway by a railway administration may have been employed either directly or through a sub-contractor by a person fulfilling a contract with a railway administration (Sec.1 (4)]. The State Government may after giving 3 months notice extend the provisions of the Act to the payment of wages to any class of persons employed in any industrial establishment or class of establishments specified by the Central Government or a State
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Government under Clause (h) of Sec. 2 (ii) Sec. 1 (5)]. In case of industrial establishments owned by the Central Government such notification can be issued with the concurrence of the Central Government [Provision to Sec. 1 (5)]. In various States the Act has been extended to shops and establishments also. The Act does not apply to persons whose wages exceed Rs.1, 600 per month [Sec. 1(6)]. This limit was raised from Rs.1, 000 to Rs.1, 600 by the Payment of Wages (Amendment) Act, 1982. The latest amendment to the Act was made in 1982. The Amending Act came into force with effect from 15th October 1982. 3.2.4 Definitions 1. Employed person [Sec. 2(1). Employed person includes the legal representative of a deceased employed person. 2. Employer [Sec. 2 (a). Employer includes the legal representative of a deceased employer. When there is a manager who is entrusted with the affairs of a company, the directors of the company cannot be said to be employers [Superintendent & Remembrance of Legal Affairs v. B.C.Saha. (1974) 45 F.J.R.489]. 3. Factory. [Sec.2 (b)]. It means a factory as defined in Sec. 2 (m) of the factories Act, 1948 have been applied under Sec. 85(1) of that Act. 4. Industrial or other establishment [Sec. 2(ii). It means anya) tramway service, or motor transport service engaged in carrying passengers or goods or both by road for hire or reward:b) air transport service other than such service beExtendeding to or exclusively employed in the military, naval or air force of the Union or the Civil Aviation Department of the Government of India; c) dock, wharf or jetty; d) inland vessel, mechanically propelled; e) mine, quarry or oil-field; f) plantation; g) workshop or other establishment in which articles are produced, adapted or manufactured, with a view to their use, transport or sale; h) establishment in which any work relating to the construction, development or maintenance of buildings, roads, bridges or canals or relating to operations connected with navigation, irrigation or supply of water or relating to the transmission or distribution of electricity or any other form of power is being carried on ; i) any other establishment or class of establishments which the Central Government or a State Government may, having regard to the nature thereof, the need for protection of persons employed therein and other relevant circumstances, specify, by notification in the Official Gazette.
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5. Mine [Sec.2 (ii a). It has the meaning assigned to it in Sec. 2(1) (f) of the Mines Act, 1952. 6. Plantation [Sec. 2(iii). It has the meaning assigned to it, in Sec. 2 (f) of the Plantation Labour Act, 1951. 7. Railway administration [Sec. 2(v). It has the meaning assigned to it in Sec. 2 (32) of the Railways Act, 1989. 8. Wages [Sec.2 (vii). Wages means all remuneration (whether by way of salary, allowances or otherwise) expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment. Simply stated, Wages means all remuneration due to any worker or employee if the terms of contract of employment are fulfilled. The definition of expression wages is made sufficiently wide by including within the expression; a) any remuneration payable under any award or settlement between the parties or order of a Court; b) any remuneration to which the person employed is entitled in respect of overtime work or holidays or any leave period; c) any additional remuneration payable under the terms of employment (whether called a bonus or by any other name); d) any sum which by reason of termination of employment of the person employed is payable under any law, contract or instrument which provides for the payment of such sum, whether with or without deductions, but does not provide for the time within which the payment is to be made; e) any sum to which the person employed is entitled under any scheme framed under any law for the time being in force. The expression wages does not include: 1) any bonus (whether under a scheme of profit-sharing or otherwise) which does not form part of the remuneration payable under the terms of employment or which is not payable under any award or settlement between the parties or order of a Court; 2) the value of any house accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the State Government; 3) any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon; 4) any traveling allowance or the value of any traveling concession; 5) any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment; 6) any gratuity payable on the termination of employment in cases other than those specified in Clause (d) above.
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The definition of the expression wages comprises 3 parts: The first part declares that wages means all remuneration which would, if the terms of the contract of employment, express or implied, were fulfilled, be payable to a person employed, in respect of his employment. This clause presents no difficulty whatsoever for it declares in an unambiguous language that an employee is entitled to receive wages in accordance with the terms of his contract. The second part says that the expression wages shall include any bonus or other remuneration of the nature aforesaid which would be so payable, i.e. payable in accordance with the terms of contract. The third part declares that the expression wages shall include any sum payable to such person by reason of the termination of his employment. The language of this clause is wide enough to embrace not only a sum payable to an employee under the terms of a contract but also a sum payable to him under the provisions of any law. 3.2.5 Rules for Payment of Wages (Section 3 to 6) Responsibility for payment of wages (Sec. 3). Every employer shall be responsible for the payment to persons employed by him of all wages required be paid under the Payment of Wages Act (Sec. 3). But in the case of persons employed (otherwise than by a contractor) in factories, industrial establishments or upon railways, the following persons shall also be responsible for the payment of wages: a) in factories, the person named as the manager; b) in industrial or other establishments, the person, if any, who is responsible to the employer for the supervision and control of the industrial or other establishment; c) upon railways (otherwise than in a factories), the person nominated by the railway administration in this behalf for the local area concerned [Proviso to Sec. 3]. Fixation of wage-periods (Sec. 4) Every person responsible for the payment of wages under Sec. 3 shall fix periods, known as wage-periods, in respect of which such wages shall be payable {Sec. 4 (1)]. A wage-period shall not exceed one month [Sec. 4 (2)]. Time of payment of wages (Sec.5) The rules relating to time of payment of wages are as follows: 1) Wages to be paid before 7th or 10th day - The wages of every person employed upon or in any railway, factory or industrial or other establishment upon or in which less than 1,000 persons are employed, shall be paid before the expiry of 7th day of the following wage-period. In case the number of workers exceeds 1,000, the wages shall be paid before the expiry of the 10th day of the following wage-period [Sec. 5 (1)].
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In the case of persons employed on a dock, wharf or jetty or in a mine, the balance of wages due on completion of the final tonnage account of the ship or wagons loaded or unloaded, as the case may be, shall be paid before the expiry of the 7th day from the day of such completion [Proviso to Sec. 5 (1)]. 2) Wages in case of termination of employment - Where the employment of any person is terminated by or on behalf of the employer, the wages earned by him shall be paid before the expiry of the 2nd working day from the day on which his employment is terminated [Sec. 5 (2)]. Where the employment of any person in an establishment is terminated due to the closure of the establishment for any reason other than a weekly or other recognized holiday, the wages earned by him shall be paid before the expiry of the 2nd day from the day on which his employment is so terminated [Proviso to Sec. 5 (2)]. 3) Exemption. The State Government may, by general or special order, exempt the person responsible for the payment of wages from the operation of the above provisions in certain cases [Sec. 5 (3)]. 4) Wages to be paid on a working day - All payment of wages shall be made on a working day [Sec. 5 (4)]. Medium of payment of wages (Sec. 6). All wages shall be paid in current coin or currency notes or both (Sec. 6). Payment of wages in kind is not permitted. The process of payment of wages in cash is very cumbersome where the number of workers is very large. It is also risky where the sum involved is large and the factory or industrial establishment is situated at a remote palace. In order to obviate these difficulties and save the worker from carrying cash on the pay day and mis-spending it, a Proviso has been added to Sec.6 by the Payment of Wages (Amendment) Act, 1976. According to it, the employer may after obtaining the written authorization of the employed person, pay him the wages either by cheque or by crediting the wages in his bank account. The provision in the Amendment Act for paying wages by cheque or depositing wages in bank account will also inculcate the banking habit among the workers and also make the process of payment simpler for the employer. 3.2.6 Deductions from Wages (Sec. 7 to 13) Deductions which may be made from wages (Sec. 7) Sec. 7 provides that the wages of an employed person shall be paid to him without deductions of any kind except those authorized by or under the Payment of Wages Act, 1936 [Sec. 7 (1)]. Kinds of deductions The deductions from wages of an employed person referred to in Sec. 7 (1) may be of the following kinds only, namely;
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1) Deductions for fines [Sec.7 (2) (a) and 8] 1) No fine shall be imposed on any employed person save in respect of such acts or omissions on his part as the employer, with the previous approval of the State Government or of the prescribed authority, may have specified by a notice [Sec. 8 (1)]. 2) The notice specifying the acts and omissions for which fines may be imposed shall be exhibited in the prescribed manner on the premises (and in case of persons employed upon a railway, at the prescribed place or places) in which the employment is carried on [Sec. 8 (2)]. 3) No fine shall be imposed on an employed person until he has been given an opportunity of showing cause against the fine and has completed the age of 15 years [Sec. 8 (3) and (5)]. 4) The total amount of fine which may be imposed in any one wage period on any employed person shall not exceed 3 per cent of the wages payable to him in respect of that wage-period [Sec. 8 (4)]. Such a fine shall not be recovered from the employed person by installments or after the expiry of 60 days from the day on which it was imposed [Sec. 8 (6)]. 5) Every fine shall be deemed to have been imposed on the day of the act or omission in respect of which it was imposed [Sec. 8 (7)]. 6) All fines and all realizations thereof shall be recorded in a register to be kept by the person responsible for the payment of wages, in such form as may be prescribed. All realizations of fines shall be applied only such purposes as are beneficial to the persons employed in the factory [Sec. 8 (8)]. 2. Deductions for absence from duty [Sec. 7 (2) (b) and 9] Deductions may be made on account of the absence of an employed person from duty [Sec. 7 (2) (b)] from the place or places where, by the terms of his employment, he is required to work. The absence may be for the whole or any part of the period during which he is so required to work [Sec. 9 (1)]. But the ratio between the amount of such deductions and the wages payable shall not exceed the ratio between the period of absence and total period within such wage-period [Sec. 9 (2)]. It has however been held in K.S.R.T. EmployeesAssn. v. General Manager, K.S.R.T., (1985) Lab. I.C. 552 (Ker.) that in a strike by workers in a public utility like transport service, if employees absent for a part of the day without notice, deduction of full days wages would not be unjustified or illegal. If, however, 10 or more employed persons, acting in concert, absent themselves without due notice and without reasonable cause, the deduction for absence from duty from any such person may include such amount not exceeding his wages for 8 days as may be due to the employer in lieu of notice [Proviso to Sec. 9 (2)]. In this regard any employed person shall be deemed to be absent from the place where he is required to work if he refuses, in pursuance of a stay-in-strike or for
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any other cause which is not reasonable in the circumstances, to carry out his work (Explanation to Sec.9). 3. Deductions for damage or loss [Sec. 7 (2) (c), (m), (n) and (o) and 10] A deduction for damage to or loss of goods expressly entrusted to the employed person for custody or for loss of money for which he is required to account shall not exceed the amount of damage or loss caused to the employer by the neglect or default of the employed person. Same is the case as regards losses sustained by a railway administration on account of any rebates or refunds incorrectly granted by the employed person [Sec. 7 (2) (c) and 10 (1)]. Sec. 10 (1-A) also provides that a deduction for damage or loss shall not be made until the employed person has been given an opportunity of showing cause against the deduction. A similar opportunity shall also he given to the employed person in case of deductions for recovery of losses sustained by a railway administration on account of: a) acceptance by the employed person of counterfeit or base, coins or mutilated or forged currency notes [Sec. 7 (2) (m)]; b) the failure of the employed person to invoice, to bill, to collect or to account for the appropriate charges due to the railway administration. The loss may relate to fares, freight, demurrage, wharfage and carnage or in respect of sale of food in catering establishments or in respect of sale of commodities in grain shops or otherwise [Sec. 7 (2) (n)]; c) any rebates or refunds incorrectly granted by the employed person where such loss is directly attributable to his neglect or default [Sec. 7 (2) (o)]. Sec. 10 (2) requires that all deductions and realizations in respect of damage to or loss of goods shall be recorded in a register to be kept by the person responsible for the payment of wages under Sec. 3. 4. Deductions for services [Sec. 7 (2) (d), (e) and 11]. A deduction for house accommodation [Sec. 7 (2) (d)] and such amenities and services supplied by the employer as have been authorized by the State Government [Sec.7 (2) (e)] shall not be made from the wages of an employed person, unless such services have been accepted by him as a term of employment or otherwise. Deductions in respect of these services shall not exceed the value thereof. In case of deductions as regards services and amenities, the State Government may impose conditions (Sec. 11). 5. Deductions for recovery of advances [Sec. 7 (2) (f) and 12]. A deduction for recovery of an advance given to an employed person is subject to the following conditions, viz., 1) recovery of an advance of money given before employment began shall be made from the first payment of wages in respect of complete wageperiod, but no recovery can be made of such advance given for travelling expenses;
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2) recovery of an advance of money given after employment began shall be subject to such conditions as the State Government may impose; 3) recovery of advances of wages not already earned shall be subject to any rules made by the State Government in this regard. The State Government may regulate the extent to which such advances may be given and the installments by which they may be recovered (Sec.12). The advance may be of any nature (including advance for traveling allowance or conveyance allowance) and the interest due in respect thereof, or for adjustment of over-payment of wages [Sec.7 (2) (f)]. Deductions for adjustment of over-payment of wages is also authorised under the Act [Sec. 7 (2) (f)]. But there is no provision in the Act limiting the period within which the employers should make the deduction for adjustment of over-payment of wages [M.G. Koshi v. A.D. Cotton Mills, A.I.R. (1959) Ker. 332]. 6. Deductions for recovery of loans [Sec. 7 (2) (fff) and 12-A]. Deductions for loans granted for house-building or other purposes and the interest due in respect thereof [Sec. 7 (2) (fff)] approved by the State Government shall be subject to any rules made by the State Government regulating the extent to which such loans may be granted and the rate of interest payable thereon (Sec. 12-A). 7. Deductions for payment to co-operative societies and insurance schemes [Sec. 7 (2) (j) and (k) and 13]. These deductions shall include: a) deductions for payments to co-operative societies approved by the State Government or to a scheme of insurance maintained by the Indian Post Office [Sec. 7 (2) (j)]; and b) deductions made with the written authorization of the person employed for the payment of any premium on his life insurance policy to the Life Insurance Cooperation of India or for the purchase of securities of the Government of India or of any State Government or for being deposited in any Post Office Saving Bank in furtherance of any saving scheme of any such Government [Sec. 7 (2) (k)]. These deductions shall be subject to such conditions as the State Government may impose (Sec. 13). Other deductions : The following deductions shall also be permitted under the Act: 1) deductions of income-tax payable by the employed persons [Sec.7 (2) (g)]; 2) deductions required to be made by order of a Court or other authority competent to make such order [Sec. 7 (2) (h)]; 3) deductions for payments to co-operative societies of advances from any provident fund to which the Provident Fund Act, 1925 applies or any recognized provident fund (as defined in Sec. 58-A of the Indian
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Income-tax Act, 1922) or any provident fund approved in this behalf by the State Government [Sec. 7 (2) (i)]; 4) deductions for payment of insurance premium on Fidelity Guarantee Bonds [Sec.7(2)(l)]; 5) deductions for recovery of losses sustained by a railway administration on account of any default by the employed person. The default may consist of acceptance of counterfeit or base coins or forged currency notes, or allowing excess rebates or refunds [Sec. 7 (2) (m)]; 6) deductions made, with the written authorization of the employed person, for contribution to the Prime Ministers National Relief Fund or to such other Fund as may be specified by the Central Government [Sec. 7 (2) (p)]; This Clause was added by the Payment of Wages (Amendment) Act, 1976]; and 7) deductions for contributions to any insurance scheme framed by the Central Government for the benefit of its employees [Sec. 7 (2) (q)]; This Clause was added by the Payment of Wages (Amendment) Act, 1977]. Limit on deductions [Sec. 7 (3)] The total amount of deductions which may be made under the above heads [Sec. 7 (2)] in a wage-period from the wages of any employed person shall not exceed 75 per cent of such wages in cases where such deductions are wholly or partly made for payments to co-operative societies under Sec. 7 (2) (j). In any other case, they shall not exceed 50 per cent of such wages [Sec. 7 (3)]. Where the total deductions authorized under Sec. 7 (2) exceed 75 per cent, or as the case may be, 50 per cent of the wages, the excess may be recovered in such manner as may be prescribed [Proviso to Sec. 7 (3)]. 3.2.7 Maintenance of Registers and Records (Sec. 13-A) Every employer shall maintain registers and records giving the following particulars of the persons employed by him: a) the work performed by them; b) the wages paid to them; c) the deductions made from their wages; d) the receipts given by them [Sec. 13-A (1)]. The registers and records shall be in such form as may be prescribed. They shall be preserved for a period of 3 years after the date of the last entry made therein [Sec.13-A(2)]. 3.2.8 Enforcement of the Act Inspectors (Sec. 14) An Inspector of Factories appointed under Sec. 8 (1) of the Factories Act, 1948 shall be an Inspector for the purposes of the Payment of Wages
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Act in respect of all factories within the local limits assigned to him [Sec. 14 (1)]. The State Government may also, by notification in the Official Gazette, appoint such other persons as it thinks fit to be Inspectors for the purposes of the Act. It may define the local limits within which and the class of factories and industrial or other establishments in respect of which they shall exercise their functions [Sec. 14 (3)]. It may also appoint Inspectors for the purposes of the Act in respect of persons employed upon a railway (otherwise than in a factory) to whom the Act applies [Sec.14 (2)]. Powers and functions of Inspectors. An Inspector may: a) make such examination and inquiry as he thinks fit in order to ascertain if the provisions of the Act or rules made there under are being observed; b) with such assistants, if any, as he thinks fit, enter, inspect and search any premises of any railway, factory or industrial or other establishment at any reasonable time for the purpose of carrying out the objects of the Act; c) supervise the payment of wages to persons employed upon any railway or in any factory or industrial or other establishment; d) require by a written order the production at such place, as may be prescribed, of any register or record maintained in pursuance of the Act. He may also take on the spot or otherwise statements of any persons which he considers necessary for carrying out the purposes of the Act. e) seize or take copies of registers or documents or portions thereof as he may consider relevant in respect of an offence under this Act which he has reasons to believe has been committed by an employer; f) exercise such other powers as may be prescribed [Sec. 14 (4)]. But no person shall be compelled under Sec. 14 (4) to answer any question or make any statement tending to incriminate himself [Proviso to Sec. 14 (4)]. The provisions of the Code of Criminal Procedure, 1973 shall, so far as may be, apply to any search or seizure as they apply to any search or seizure made under the authority of a warrant issued under Sec. 94 of the said Code [Sec.14 (4-A)]. Inspector deemed to be a public servant. Every employer shall be deemed to be a public servant within the meaning of the Indian Penal Code 1860 [Sec. 14(5)]. Facilities to be afforded to Inspectors. Every employer shall afford and Inspector all reasonable facilities for making any entry. Inspection, supervision, examination or inquiry under the Act. (Sec. 14-A) 3.2.9 Claims arising out of deductions from wages The scheme of Payment of Wages Act is that all claims arising out of deductions from wages or delay in the payment of wages are to be decided
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by the Aut hority appo int ed by the Stat e Government under (Sec 15) and not by a Civil Court [Marute M.Mullik v. Poison Ltd. (1970) Lab. I.C. 308). It was further observed in Authority Sabastian Almenda v. Taylor R.M. A.I.R.(1956) Bomb.737 that the Authority under the Payment of Wages Act constitutes a Court or a Tribunal of summary jurisdiction and the clear object of the Legislature in setting up this Court or tribunal is to give facilities to the employee to recover his wages as expeditiously as possible. (Rameshwar Lal v. jogender Dass. A.IR.(1970) Ori.76). Sec. 15 empowers the State Government to appoint some person as the Authority to hear and decide for any specified area all claims arising out of (a) deductions from the wages, or (b) delay in payment of the wages of persons employed or paid in that area, including all matters incidental to such claims. The appointment shall be made by notification in the Official Gazette. The following may be appointed as the Authority as aforesaid: 1) a presiding officer of any Labour Court or Industrial Tribunal, constituted under the Industrial Disputes Act, 1947, or under any corresponding law relating to the investigations and settlement of industrial disputes in force in the State; or 2) any Commissioner for Workmens Compensation, or 3) any other officer with experience as a Judge of a Civil Court or as a stipendiary Magistrate (Sec. 15(1)]. The State Government may, where it considers necessary so to do, appoint more than one Authority for any specified area. It may, by general or special order, also provide for the distribution or allocation of work to be performed by them under this Act [Provision to Sec. 15(1)]. Powers of Authorities appointed under Sec. 15. Sec. 18 provides that every Authority appointed under Sec. 15(1) shall have all the powers of a Civil Court under the Code of Civil Procedure, 1908, for the purpose of a) taking evidence and enforcing the attendance of witnesses and b) compelling the production of documents Further every such Authority shall be deemed to be a Civil Court for all the purposes of Sec. 195 and of Chapter XXVI of the Code of Criminal Procedure, 1973. Who may file application? An application for claims arising under the Act may be filed by a) the person employed himself, or b) any legal practioner, or c) any official of a registered trade union authorized in writing to act on his behalf, of d) any Inspector under the act, of e) any other person acting with the permission of the Authority appointed under Sec. 15(1) [Sec. 15(2)].
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Application to be filed within 12 months. Every application for claims under the Act shall be presented within 12 months from the date on which the deduction from the wages was due to is made [Proviso 1 to Sec. 15 (2)]. An application may also be admitted after 12 months if the applicant satisfies the Authority that there was a sufficient cause for not making the application within 12 months [proviso 2 to Sec. 15(2)]. Procedure : When any application for claims under the Act is entertained, the authority shall hear the applicant and the employer or other persons responsible for the payment of wages under sec. 3 or give them an opportunity of being heard. The Authority shall make such further inquiry as may be necessary. It may direct the refund to be made to the employed person of the amount deducted or the payment of the delayed wages together with such compensation as it may think fit. The compensation shall not exceed 10 times the amount improperly deducted, and Rs. 25 in case of delayed wages. Even where the deducted or delayed wages are paid before the disposal of the application, the Authority may direct the payment of such compensation as it may think fit. This amount of compensation shall however not Rs.25 [Sec. 15(3)] exceeds. No direction if the Authority is satisfied. No direction for the payment of compensation shall be made in the case of delayed wages if the Authority is satisfied that the delay was due to: a) a bona fide error or dispute; or b) the occurrence of an emergency or the existence of exceptional circumstances; or c) the failure of the employed person to apply for or accept payment [Proviso to Sec. 15 (3)].
Malicious or vexatious application. If the Authority hearing an application is satisfied that the application was malicious or vexatious, it may direct a penalty not exceeding Rs.50 to be paid to the employer or other person responsible for payment of wages, by the person presenting the application [Sec. 15 (4) (a)]. The authority may further direct that a penalty not exceeding Rs.50 be paid to the State Government by the employer or other person responsible for the payment of wages in cases where the applicant ought not to have been compelled to seek redress under Sec.15 [Sec. 15 (4) (b)]. Dispute as to legal representatives. Where there is any dispute as to the person or persons being the legal representative or representatives of the employer or of the employed person, the decision of the Authority on such dispute shall be final [Sec. 15 (4-A)]. Inquiry under Sec. 15 is a judicial proceeding. Any inquiry under Sec. 15 shall be deemed to be a judicial proceeding within the meaning of Secs. 193, 219 and 228 of the Indian Penal Code, 1860 [Sec. 15 (4-B)]. Recovery of amount. Any amount directed to be paid under Sec.15 may be recovered:
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a) if the Authority is a Magistrate, by the Authority as if it were a fine imposed by him as Magistrate [Sec. 15 (5)]. Single application in respect of claims (Sec. 16). A single application may be presented under Sec. 15 on behalf of or in respect of any number of employed persons beExtendeding to the same unpaid group. When a single application is made, every person on whose behalf such application is presented may be awarded maximum compensation to the extent specified in Sec. 15 (3) [Sec. 16 (2)]. Employed persons are said to beExtended to the same unpaid group if they are borne on the same establishment and: 1) if deductions have been made from their wages in contravention of the Act for the same cause and during the same wage-period or periods, or 2) if their wages for the same wage-periods have remained unpaid after the day fixed by Sec. 5 [Sec. 16 (1)]. The authority may deal with any number of separate pending applications, presented under Sec. 15 in respect of persons beExtendeding to the same unpaid group, as a single application [Sec. 16 (3)]. Appeal (Sec. 17). An appeal may be preferred in a Presidency-town before the Court of Small Causes and elsewhere before the District Court against: i) an order dismissing either wholly or in part an application made under Sec. 15 (2), or
ii) a direction made under Sec. 15 (3) by the Authority to refund to the employed person the amount deducted from wages or under Sec. 15 (4) by the Authority for payment of penalty to the employer. The appeal may be preferred within 30 days of the date on which the order or direction was made [Sec. 17 (1)]. The Court may, if it thinks fit, submit any question of law for the decision of the High Court and, if it so does, shall decide the question in conformity with such decision [Sec.17 (4)]. Who may appeal? The appeal may be preferred by: a) the employer or other person responsible for the payment of wages under Sec.3, if the total sum directed to be paid by way of wages and compensation exceeds Rs.300 or such direction has the effect of imposing on the employer or the other person a financial liability exceeding Rs.1,000 [Sec. 17 (1) (a)]; or b) an employed person, if the total amount of wages claimed to have been withheld from the employed person exceeds Rs.20 or from the unpaid group to which the employed person beExtendeds or beExtendeded exceeds Rs.50. The appeal may also be made by any legal practitioner or any official of a registered trade union authorized in writing to act on
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behalf of the employed person or any Inspector under the Act, or any other person permitted by the Authority to make an application under Sec. 15 (2) [Sec. 17 (1) (b)]; or c) any person directed to pay a penalty under Sec.14 (4) [Sec. 17 (1)(d)]. Where an employer prefers an appeal under Sec. 17 the authority against whose decision the appeal has been preferred may, and if so directed by the Court shall, pending the decision of the appeal, withhold payment of any sum in deposit with it [Sec.17 (3)]. Penalty for offences under the Act (Sec. 20). Penalty for delaying payment of wages within the prescribed period or making unauthorized deductions. Whoever being responsible for the payment of wages to an employed person delays payment of wages within the period laid down under the Act or makes unauthorized deductions shall be punishable with fine which shall not be less than Rs.200 but which may extend to Rs.1,000 [Sec. 20 (1)]. Penalty for not paying wages on a working day or in current coin or not recording fines or not displaying the abstracts of the Act. Not paying the wages on a working day, or not paying wages in current coin or currency or both, or not displaying by notice abstracts of the Act and rules, are also offences punishable with a fine which may extend to Rs.500 for each offence [Sec. 20 (2)]. Penalty for failure to maintain, furnish records and returns. Whoever being required under the Act to maintain any records or registers or to furnish any information or returna) fails to maintain such register or record; or b) willfully refuses or without lawful excuse neglects to furnish such information or return; or c) willfully furnishes or causes to be furnished any information or return which be knows to be false; d) refuses to answer or willfully gives a false answer to any question necessary for obtaining any information required to be furnished under the Act; Shall, for each such offence, be punishable with fine which shall not be less than Rs.200 but which may extend to Rs.1, 000 [Sec. 20 (3)]. Penalty for obstructing, etc. Inspector. Whoever: a) willfully obstructs an Inspector in the discharge of his duties under the Act; or b) refuses or willfully neglects to afford an Inspector any reasonable facility for making any entry, inspection, examination, supervision, or inquiry authorized by or under the Act in relation to any railway, factory or industrial or other establishment; or c) willfully refuses to produce on the demand of an Inspector any register or other document kept in pursuance of the Act; or
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d) prevents or attempts to prevent any person from appearing before an Inspector acting in pursuance of his duties under the Act. Shall be punishable with fine which shall not be less than Rs.200 but which may extend to Rs.1, 000 [Sec. 20 (4)]. Subsequent offence. If any person who has been convicted of any offence punishable under the Act is again guilty of an offence involving contravention of the same provision, he shall be punishable on a subsequent conviction with imprisonment for a term which shall not be less than 1 month but which may extend to 3 months, or with fine which shall not be less than Rs.500 but which may extend to Rs.3, 000 or with both [Sec. 20 (5)]. But no cognizance shall be taken of an earlier conviction made more than 2 years before the date of the commission of the present offence [Proviso to Sec. 20 (5)]. Additional fine for failure to pay wages by the fixed date. If any person fails or willfully neglects to pay the wages of any employed person by the fixed date, he shall, without prejudice to any other action that may be taken against him, be punishable with an additional fine which may extend to Rs.100 for each day for which such failure or neglect continues [Sec. 20 (6)]. The words additional fine do not contemplate a fine subsequent to one imposed earlier [Kanta Press v. Prescribed Authority, (1988) 56 F/L/R/ 301 (All.) (D.B.)]. 3.2.10 Miscellaneous Bar of suits (Sec. 22). No Court shall entertain any suit for the recovery or wages or of any deduction from wages in so far as the sum so claimed: a) forms the subject of an application under Sec. 15 which has been presented by the plaintiff and which is pending before the Authority appointed under that Section or of an appeal under Sec. 17; or b) has formed the subject of a direction under Sec. 15 in favour of the plaintiff; or c) has been adjudged, in any proceeding under Sec. 15, not to be owed to the plaintiff; or d) could have been recovered by an application under Sec.15. Protection of action taken in good faith (Sec.22-A). No suit, prosecution or other legal proceeding shall lie against the Government or any officer of the Government for anything which is in good faith done or intended to be done under the Act. Contracting out (Sec. 23). Any contract or agreement whereby an employed person relinquishes any right conferred by the Act shall be null and void in so far as it purports to deprive him of such right [Armugham v. Jawahar Mills, A.I.R. (1956) Mad. 76]. If a deduction is unauthorized, no agreement, even if true, could give an employer a right to make such deduction [Bharat Airways Ltd. v. S.R. Chakrabarti, (1955) 1 L.L.J. 89].
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Display by notice of abstracts of the Act (Sec. 25). The person responsible for the payment of wages to persons employed in a factory or an industrial or other establishment shall cause to be displayed a notice containing such abstracts of the Act and of the rules made there under in English and in the language of the majority of the persons employed in the factory or an industrial or other establishment, as may be prescribed. Payment of undisguised wages in case of death of employed person (Sec. 25-A). In case of death of an employed person or in case of his whereabouts not being known, all amounts payable to him as wages, shall: a) be paid to the person nominated by him in this behalf in accordance with the rules made under the Act; b) be deposited with the prescribed Authority: i) where no nomination has been made, or ii) where for any reasons such amounts cannot be paid to the person nominated. The prescribed Authority shall deal with the amounts deposited in the prescribed manner. The above rule is subject to the other provisions of the Act [Sec. 25-A (1)]. Where the amounts payable by an employer as wages are disposed of in the manner referred to in Sec. 25-A (1), the employer shall be discharged of his liability to pay those wages [Sec. 25-A (2)]. Rule-making power (Sec.26). Rules to regulate procedure of Authorities. The State Government may make rules to regulate the procedure to be followed by the Authorities and Courts referred to in Secs. 15 and 17 [Sec. 26 (1)]. Contravention of rule punishable with fine. In making any rule under Sec. 26, the State Government may provide that a contravention of the rule shall be punishable with fine which may extend to Rs.200 [Sec. 26 (4)]. Previous publication of rules. All rules made under Sec. 26 shall be subject to the condition of previous publication and the date to be specified under Sec. 23(3) of the General Clauses Act, 1897 shall not be less than 3 months from the date on which the draft of the proposed rules was published [Sec. 26(5)]. Rules made by the Central Government to be laid before the Parliament. Every rule made by the Central Government under Sec. 26 shall be laid, as soon as may be after it is made, before each House of Parliament while it is in session for a total period of 30 days. This period of 30 days may be comprised in one session or in 2 or more successive sessions. If both Houses agree in making any modification in the rule, the rule shall thereafter have effect only in such modified form. If both Houses agree that the rule should not be made. It shall have no effect. But any such modification or annulment of the rule shall be without prejudice to the validity of anything previously done under that rule [Sec. 26(6)].
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Have you understood ? Objective Questions : 1. The payment of the Wages Act was enacted in the year _____________. a. 1936 a. true b. 1835 b. false c. 1836 d. 1946 2. Bonus is not included as a component of wage. 3. Wages should be paid on or before ____________of the month. a. before 11th or 12th b. 13th or 14th c. 7th or 10th d. 14th or 15th 4. Wages can be paid on any day. a. True b. False Short Questions : 5. Define Wages. 6. What are the powers of the Inspectors of Wages? 7. What sort of claim is available for unauthorized deductions? Extended Questions : 8. Explain the various types of deductions in the payment of Wages. 9. Discuss about the procedures to be followed in the maintenance of regis ter and records. Summary : The Wages Act applies to the method and procedures to be adapted to the payment of wages for persons employed in any factory. This Act specify that, how the wages as to be determined and the eligibility for deductions. The deductions should be according to the Wages Act. If there is any violation against the deductions, there is provision for claims. The State Government may give 3 months notice to extend the provisions of the Act to any class of persons employed in any industrial establishment or class of establishments specified by the Central Government or a State Government. 3.3 The Payment of Bonus Act 1965
3.3.1 Introduction- The Payment of Bonus Act, 1965 The dictionary meaning of the word bonus is something to the good especially extra dividend to the shareholders of a company, distribution of profits to insurance policy-holders or gratuity to workmen beyond their wages. It is the last meaning of the word, which has acquired significance for labour management relations in India. Till recently, bonus was regarded as an ex gratia, payment [payment as an act of grace) made by an employer to his workers to provide a stimulus for extra effort by them in the production process; on occasions, it also represented the desire of the employer to share with his workers the surplus generated
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by common endeavor and enterprise. From this limited connotation of the word, we have traveled a Extended way to reach the stage of enactment of the Payment of Bonus Act, 1965, which makes this annual payment obligatory on the employers. The term bonus is not defined in the Payment of Bonus Act, 1965 or in any other enactment. The Act came into force on 5th September, 1965. It was amended twice in 1985. The payment of Bonus (Amendment) Act, 1985 abolished Sec. 12 of the Act. The Payment of Bonus (Second Amendment) Act, 1985 again introduced a new Sec. 12. 3.3.2 Learning Objectives After studying this unit you should be able to:

Understand the objects of Payment of Bonus Act 1965. Explore the application of the Bonus Act. Know the definitions of the Bonus Act. Study the eligibility and disqualifications for bonus Determine the computations of bonus Study the possible deductions in bonus
3.3.3 Object to the Act In Hutti Gold Mines Kamgar Sangh v. Government of India, (1973), 1 l.L.J.46 (A.P.), it was observed that the object of the Payment of Bonus Act, 1965 is to maintain peace and harmony between labour and capital by allowing the employees, in recognition of their right, to share in the prosperity of the establishment reflected by the contributions made by capital, management and labour. In Associated Cement Cos. Ltd. (Dwaraka & Bombay) v. Their Workmen, A.I.R. (1956), S.C.967, the Supreme Court observed: The theory of social justice on which the workmens right to bonus is founded has a dual basis, namely, the contribution which the workmen have made to the earning of profits by the industry, and the need to fill up the gap between the living wage and the actual wages paid. The object of the Act is to provide for the payment of bonus to persons employed in certain establishments and for matters connected therewith. The Scheme of the Act, broadly stated, is four dimensional, i.e. 1) to impose statutory liability upon an employer of every establishment covered by the Act to pay bonus to employees in the establishment ; 2) to define the principle of payment of bonus according to the prescribed formula; 3) to provide for payment of minimum and maximum bonus and linking the payment of bonus with the scheme of set-off and set-on and 4) to provide machinery for enforcement of the liability for payment of bonus
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(Jalan Trading Co. (Pvt) v. Mills Mazadoor Union, A.I.R. (1967) S.C.961]. A minimum bonus of 8.33 percent of the wage of salary (up to Rs.1, 600) of an employee (Rs.60 in case of employees below the age of 15 years) is payable irrespective of the fact whether the establishment has made a profit or loss. Bonus is no Extendeder linked with production and profitability. Liability for bonus is a statutory liability and not a contingent liability. 3.3.4 Application of the Act The Act extends to the whole of India [Sec. 1(2)]. It applies to: a) every factory [as defined in Sec. 2(m) of the Factories Act, 1948]; b) every other establishment in which 20 or more persons are employed on any day during any accounting year [Sec. 1(3)]. A provision introduced in Sec. 1(3) by the Amendment Act of 1976 now empowers the appropriate Government to make the provisions of the Payment of Bonus Act, 1965 applicable to any establishment employing less than 20 but not less than 10 persons. The appropriate Government can do so after giving a notice of not less than 2 months by issuing a notification in the Official Gazette and specifying therein the accounting year from which the enforcement of the provisions will be made. This amendment has benefited the employees of smaller concerns which were not formerly covered by the Act. The application of the Act to a factory or an establishment is subject to the other provisions of the Act (as contained in Secs. 16, 20 and 32). An establishment to which this Act applies shall continue to be governed by the act notwithstanding that the number of persons employed therein falls below 20 or the number specified in the notification issued under Proviso to Sec. 1(3) [Sec.1(5)]. The employment of 20 or more persons even for 1 day in a year is sufficient to attract the provisions of the Act [Ramanujam Press v. R.P.F.Commr. A.I.R. (1970) Mad, 224]. In deciding the number of persons employed in an establishment, all employees even those drawing up to Rs.3, 500 must be taken into consideration. The strength of the employees of an establishment would be taken into consideration, irrespective of their place of work. As to what is an establishment would be in each case a question of fact. Definition of establishment The term establishment is not defined in the Act. It is a far wider term than factory which has a special legal connotation and meaning. Sec. 3, however, provides that where an establishment consists of different departments or undertakings or has branches. Whether situated in the same place or in different places, all such departments or undertakings or branches shall be treated as parts of the same establishment for the purpose of computation of bonus under the Act.
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Establishments to departments, undertakings and branches (Sec. 3) Where an establishment consists of different departments or undertakings or has branches, whether situated in the same place or in different places, all such departments or undertakings or branches shall be treated as parts of the same establishment for the purpose of computation of bonus under this Act. (Sec.3). Where for any accounting year a separate balance sheet and profit and loss account are prepared and maintained in respect of any such department or undertaking or branch, then, such department or undertaking of branch shall be treated as a separate establishment for the purpose of computation of bonus under this Act for that year, unless such department or undertaking or branch was, immediately before the commencement of that accounting year, treated as part of the establishment for the purpose of computation of bonus [Proviso to Sec. 3]. Act not to apply to certain categories of employees (Sec. 32). Sec. 32 lays down that the Act shall not apply to certain categories of persons mentioned therein. It excludes the following persons from the operation of the Act: 1) employees employed by the Life Insurance Corporation of India, 2) seamen as defined in Sec. 3 (42) of the Merchant Shipping Act, 1958; 3) employees registered or listed under any scheme made under the Dock Workers (Regulation of Employment) Act, 1948, and employed by registered or listed employers; 4) employees employed by an establishment engaged in any industry carried on by or under the authority of any department of the Central Government or State Government or a local authority : 5) employees employed by a) the Indian Red Cross Society or any other Institution of a like nature including its branches); b) universities and other educational institutions; c) institutions (including hospitals, chambers of commerce and social welfare institutions) established not for purposes of profit; 6) employees employed through contractors on building operations; 7) employees employed by the Reserve Bank of India; 8) employees employed by a) the Industrial Finance Corporation of India; b) any Financial Corporation established under Sec. 3 or any Joint Financial Corporation established under Sec. 3A of the State Financial Corporations Act, 1951; c) the Deposit Insurance Corporation; d) the National Bank for Agriculture and Rural Development; e) the Unit Trust of India; f) the Industrial Development Bank of India; g) the Small Industries Development Bank of India; h) the National Housing Bank;
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i)
any other financial institution (other than a banking company) being an establishment in public sector, which the Central Government may, by notification in the Official Gazette, specify having regard to (i) its capital structure (ii) its objective and the nature of its activities (iii) the nature and extent of financial assistance or any concession given to it by the Government, and (iv) any other relevant factor:
9) employees employed by inland water transport establishments, operating on routes passing through any other country. Power of exemption (Sec. 36) The appropriate Government may, having regard to the financial position and other relevant circumstances of any establishment or class of establishments, exempt, by notification in the Official Gazette, such establishment or class of establishments from all or any of the provisions of the Payment of Bonus Act. It may do so if it is of opinion that it will not be in public interest to apply all or any of the provisions of such establishment or class of establishments. It may exempt such establishment or class of establishments from the application of such provisions of the Act for such period as may be specified in the notification and impose such conditions as it may thing fit to impose. Order refusing exemption under sec. 36 should be speaking one and objective. An order passed in a proceeding under Sec. 36 refusing exemption must be speaking one as the proceedings under this Section are quasi-judicial. It is passed without giving reasons, it is invalid. In case of general observations in the order that a company is not entitled for exemption in public interest in view of its financial position and other relevant circumstances, the order is not speaking one. Financial position detailing liabilities and assets etc, of the company and specific circumstances which weighed refusal of exemption, should find place in order. [Associated Publishers (Madras) Ltd. V. Govt. of Tamil Nadu. (1985) I L.L.J. 63 (Mad)]. 3.3.5 Definitions 1. Accounting year [Sec. 2(1)]. It means: i) in relation to a corporation, the year ending on the day on which the books and accounts of the corporation are to be closed and balanced ; ii) in relation to a company, the period in respect of which any profit and loss account of the company laid before it in annual general meeting is made up, whether that period is a year or not ; iii) in any other case (a) the year commencing on the first day of April, or (b) if the accounts of an establishment maintained by the employer thereof are closed and balanced on any day other than the 31st day of March, then at the option of the employer, the year ending on the day on which its accounts are so closed and balanced. An option once exercised by the employer under Clause (iii) (b) shall not again be exercised except with the previous permission in writing of
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the prescribed authority and upon such terms as the authority may think fit to impose. 2. Allocable surplus [Sec.2 (4)]. It means: a) in relation to an employer, being a company (other than a banking company) which has not made the arrangements prescribed under the Income-tax Act, 1961 for the declaration and payment within India of the dividends payable out of its profits in accordance with the provisions of Sec. 194 of the Income-tax Act, 1961, 67 per cent of the available surplus in an accounting year; b) in any other cause, 60 per cent of the available surplus. The allocable surplus is the workers share in the available surplus as defined in Sec.2 (6). 3. Appropriate Government (Sec. 2(5)]. It means: i) in relation to an establishment in respect of which the appropriate Government, under the Industrial Disputes Act, 1947, is the Central Government, the Central Government. ii) in relation to any other establishment, the Government of the State in which that establishment is situate. 4. Available surplus (Sec. 2(6)]. It means the available surplus computed under Sec. 5. The other relevant Sections which deal with calculation of available surplus are Secs. 4, 6 and 7. Under Sec. 4 gross profits are to be calculated in the manner specified in the First and Second Schedules. The available surplus in respect of any accounting year is the gross profit for that year after deducting there from the sums referred to in (Sec. 6 and Sec. 5). According to Sec. 6 the sums to be deducted from the gross profit as priority charges are any amount of depreciation, any amount by way of development rebate or investment allowance or development allowance any direct tax calculated according to the provisions of Sec.7 (which deals with calculation of direct tax by the employer) and other sums mentioned in the Third Schedule. 5. Award [Sec. 2 (7)]. It means an interim or final determination of any industrial dispute or of any question relating thereto by any Labour Court, Industrial or National Tribunal constituted under the Industrial Disputes Act, 1947, or by any other authority constituted under any corresponding law relating to investigation and settlement of industrial disputes in force in a State. It also includes an arbitration award made under Sec. 10A of that Act. 6. Banking company {Sec. 2 (8)]. It means banking company as defined in Sec.5 of the Banking Regulation Act, 1949, and includes the State Bank of India, any subsidiary bank as defined in the State Bank of India
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(Subsidiary Banks) Act, 1959, any corresponding new bank specified in the First Schedule to the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, any corresponding new bank constituted under Sec. 3 of the Banking Companies (Acquisition and transfer of Undertakings) Act, 1980, any co-operative bank as defined in Sec. 2 (b) (ii) of the Reserve Bank of India Act, 1934 and any other banking institution which may be notified in this behalf by the Central Government. 7. Company [Sec. 2 (9)]. It means any company as defined in Sec.3 of the Companies Act, 1956 and includes a foreign company. 8. Co-operative Society [Sec. 2 (10)]. It means a society registered or deemed to be registered under the Co-operative Societies Act, 1912, or any other law for the time being in force in any State relating to cooperative societies. 9. Corporation [Sec .2 (11)]. It means any body corporate established by or under any Central, Provincial or State Act but does not include a company or a co-operative society. 10. Direct Tax [Sec.2 (12)]. It means: a) any tax chargeable under (i) the Income-tax Act, 1961, (ii) the Super Profits Act, 1963, (iii) the Companies (Profits) Surtax Act, 1964, (iv) the agricultural Income-tax laws, and b) any other tax which, having regard to its nature or incidence may be declared by the Central Government, by notification in the Official Gazette, to be direct tax for the purposes of the Act. 11. Employee [Sec.2 (13)]. Employee means any person (other than an apprentice) employed on a salary or wage not exceeding Rs.3,500 [the limit was raised from Rs.2,500 to Rs.3,500 by the payment of Bonus (Amendment) Ordinance, 1995] per mensem in any industry to do any skilled or unskilled, manual, supervisory, managerial, administrative, technical or clerical work for hire or reward. It makes no difference whether the terms of employment are express or implied. Where the salary or wage of an employee exceeds Rs.2,500 per mensem, the bonus payable to such employee under Sec. 10 or, as the case may be, under Sec. 11, shall be calculated as if his salary or wage were Rs.2,500 per mensem (Sec. 12). This means employees getting salary or wage up to Rs.3, 500 will be covered by the Act, but for payment of bonus or wage will be taken as Rs.2, 500. 12. Employer [Sec. 2 (14)]. Employer includes: i) in relation to an establishment which is a factory, the owner or occupier of the factory, including the agent of such owner or occupier, the legal representative of a deceased owner or occupier and the manager of the factory;
ii) in relation to any other establishment, the person who, or the authority which, has the ultimate control over the affairs of the establishment. Where the said affairs are entrusted to a manager or managing director, such manager or managing director is the employer.
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13. Establishment in private sector [Sec. 2 (15)]. It means any establishment other than an establishment in public sector. 14. Establishment in public sector [Sec. 2 (16)]. It means any establishment owned, controlled or managed by: a) a Government company as defined in Sec. 617 of the Companies Act, 1956; b) a corporation in which not less than 40 per cent of the capital is held whether singly or taken together by: i) the Government, or ii) The Reserve Bank of India, or iii) a corporation owned by the Government or the Reserve Bank of India. 15. Factory [Sec. 2 (17)]. It shall have the same meaning as in Sec. 2 (m) of the Factories Act, 1948. 16. Gross profits [Sec. 2 (18)]. It means the gross profits calculated under Sec. 4. 17. Income-tax Act [Sec. 2 (19)]. It means the Income-tax Act, 1961. 18. Salary or wage [Sec. 2 (21)]. It means all remuneration (other than remuneration in respect of overtime work) capable of being expressed in terms of money, which would, if the terms of employment, express or implied, were fulfilled, be payable to an employee in respect of his employment or of work done in such employment. It includes dearness allowance (that is to say, all cash payments, by whatever name called, paid to an employee on account of rise in the cost of living). But it does not include: i) any other allowance which the employee is for the time being entitled to; ii) the value of any house accommodation or of supply of light, water, medical attendance or other amenity or of any service or of any concessional supply of food grains or other articles; iii) any traveling concession;. iv) any bonus (including incentive, production and attendance bonus); The definition of the term wages does not include bonus because for the purposes of the Act bonus has to be distinguished from wages and has to be determined in relation to the wages paid to the employee [Gopalan v. Angamali Chit Fund, A.I.R. (1977) Ker. 120)]. v) any contribution paid or payable by the employer to any pension fund or for the benefit of the employee under any law for the time being in force; vi) any retrenchment compensation or any gratuity or other retirement benefit payable to the employee or any ex gratia payment made to him; vii) any commission payable to the employee. Explanation to Sec. 2 (21) further provides that where an employee is
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given in lieu of the whole or part of the salary or wages payable to him, free food allowance or free food by his employer, such food allowance or the value of such food shall, for the purpose of Sec.2 (21), be deemed to form part of the salary or wage of such employee. 3.3.6 Eligibility and disqualification for Bonus Eligibility for bonus (Sec. 8). Every employee shall be entitled to be paid by his employer in an accounting year, bonus, in accordance with the provisions of the Act, provided he has worked in the establishment for not less than 30 working days in that year (Sec. 8). Where an employee has not worked for all the working days in any accounting year, the bonus payable to him under Sec. 10 shall be proportionately reduced (Sec. 13). Disqualification for bonus (Sec. 9). Notwithstanding anything contained in the Act, an employee shall be disqualified from receiving bonus under the Act, if he is dismissed from service for: a) fraud, or b) riotous or violent behaviour while on the premises of the establishment, or c) theft, misappropriation or sabotage of any property of the establishment. 3.3.7 Determination of Bonus Bonus, under the Payment of Bonus Act, cannot be claimed by workers as a matter of right. The Bonus Formula under the Act rests on the calculation of the available surplus and allocable surplus it envisages the following steps; Computation of gross profit (Sec.4). The computation of gross profits for an accounting year for the purpose of the bonus formula is the first step. It is calculated according to the Sec. 4 of the Act. Item 1 Net profit as per P&L account. Item 2- Add back Bonus to employees + Depreciation + Development rebate to the extent charged to P&L account + Any other reserves to the extent charged to P & L account. Item 3 Add back Bonus paid in respect of previous year to the extent charged to P& L account + Provision in P & L account in respect of gratuity over and above the payment made to approved gratuity fund or in excess of amount actually paid to employees on their retirement or termination + Dominations in excess of amount admissible to income tax + any amount certified by RBI in terms of section 34A(2) of Banking Regulation Act + Capital expenditure to the extent charged to P&L account + losses or expenditure relating to business situated outside India. Item 4 Add also Income directly credited to reserves other than capital receipts, profit relating to business out of India and Income of
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foreign concerns from investment outside India. Item 5- Total of items No. 1, 2, 3 and 4 Item 6 Deduct Capital receipts and profits to the extent credited to P& L account- Profits of business outside India Income of foreign concerns from investment outside India to the extent credited to P & L account- Expenditure or losses directly debited to reserves other than capital expenditure and capital losses proportionate administrative expenses of foreign head office allocable to Indian business in the proportion of Indian gross profit to total world gross profit adjusted consolidated P & L account Refund of direct taxes to the extent credited to P & L account cash subsidy given by the Government. Item 7 Gross profit for purpose of bonus Item 5- Item 6 Computation of gross profits in case of banking company [Sec. 4 (a)]. The gross profits derived by an employer from an establishment in respect of any accounting year shall, in the case of banking company, be calculated in the manner specified in the First Schedule. 3.3.8 Deductions Deductions of Prior Charges In addition, some minimum return on capital employed allowed as deduction, to be calculated as provided in Third schedule to the Bonus Act. These are termed as prior charges . Thus following are to be deducted from gross profit. Depreciation Development rebate or investment allowance Deduction of direct tax Reduction capital employed Deduction of direct taxes No account of arrears of depreciation or carry forward losses Provisions in respect of religious or charitable institutions HUF/ Individual as employer Export rebate to be considered No rebate for development of Industry to be considered Allocable Surplus Allocable surplus is equal to 60 % of available surplus calculated as per provisions of section 5. This allocable surplus has to be distributed as bonus among employees during the year. However, this is subject to minimum 8.33 % and maximum 20 %. Salary or wages for calculating bonus Employees drawing salary or wages between Rs. 2,500 to Rs 3, 500 per month are entitled to bonus on the bonus of Rs 2,500 per month salary only.
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Adjustments of customary or interim bonus Where in any accounting year an employer has paid any puja bonus or other customary to an employee, or an employer has paid a part of the bonus payable this Act to an employee before the date on which such bonus becomes payable, the employer shall be entitled to deduct the amount of bonus so paid from the amount of bonus payable by him to the employee under this Act in respect of that accounting year and the employee shall be entitled to receive only the balance. Time limit for the payment of bonus All amounts payable to an employee by way of bonus under this Act shall be paid in cash by the employer. Bonus should be paid within a period of eight months from the close of the accounting year. Where there is a dispute regarding payment of bonus pending before any authority under section 22, bonus shall be payable within a month from the date on which the award becomes enforceable or the settlement comes into operation, in respect of such dispute. Disqualification of an employee for bonus An employee shall be disqualified from receiving bonus under this Act, if he is dismissed from service for Fraud, Riotous or Violent behaviour while on the premises of the establishment or Theft, misappropriation or sabotage of any property of the establishment. I- Objective Questions : 1. The minimum bonus payable is _________________ a. 7.33 % b. 6.33 % c. 8.33 % d. 9.33 % 2. The maximum bonus shall not exceed ______________ a. 19 % b. 20 % c. 25 % d. 27% 3. Financial year for the purpose of bonus is_____________________ a. July June b. November October d. February- March II-Short Questions : 4. Explain the meaning of allocable surplus. 5. What is eligibility for Bonus. 6. Explain the various reasons for deductions from bonus. III- Extended Questions : 7. State the special provisions of Payment of Bonus Act. 8. Does this Act prescribe any disqualifications also for claiming bonus? Explain. Summary Bonus is really a reward for good work or share of profit of the unit where the employee is working. Often there were disputes between employer and employees over bonus to be paid. It was thought that
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legislation will solve the problem and hence Bonus Act was passed. Unfortunately, in the process, bonus has become almost as deferred wages due to provision of payment of minimum 8.33 % and maximum 20 % bonus. Bonus Act has not in way reduced. Now, Bonus is accepted by Trade Unions as per Bonus Act and disputes are raised about ex gratia amount to be paid. 3.4 Minimum Wages Act, 1948
3.4.1 Introduction The object of the Act is to secure the welfare of the workers in a competitive labour market by fixing the minimum rates of wages in certain employments. The Legislature undoubtedly intended to apply the Act to those industries or localities in which, by reason of causes such as, unorganised labour or absence of machinery for regulation of wages, wages paid to workers were, in the light of general level of wages and subsistence level, inadequate [Bhikusa Yamasa Kshatriya v. Sangammer Akola Taluka, Bidi Kamgar Union, A.I.R. (1963) S.C. 806]. The Minimum Wages Act was passed in 1948 enabling the Central and State Governments to fix minimum rates of wages payable to employees in a selected number of sweated industries. The Act applies to the whole of India. 3.4.2 Learning Objectives After studying this unit you should be able to:

Understand the definition of Minimum Wages. Determine the schedules of the Minimum Wages Act. Know the provisions of fixation and revision of Minimum Wages. Study the governing procedures of Advisory Board and Central Advisory Board Know the method and procedures of safeguards in Payment of Minimum Wages
3.4.3 Definitions 1. Adolescent [Sec. 2 (a)] - Adolescent means a person who has completed his 14th year of age but not completed his 18th year. 2. Adult [Sec.2 (aa)] - Adult means a person who has completed his 18th year of age. 3. Appropriate Government [Sec. 2 (b)] - Appropriate Government, in relation to any scheduled employment carried on by or under the authority of the Central Government or a railway administration, or in relation to a mine, oilfield or major port, or any corporation established by a Central Act, means the Central Government [Sec. 2 (b) (i)] In relation to any other scheduled employment (which means an
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employment specified in the Schedule to the Act), the appropriate Government means the State Government [Sec. 2 (b) (ii)]. 4. Child [Sec. 2 (bb)] - Child means a person who has not completed his 14th year of age. 5. Competent authority [Sec. 2 (c)] - Competent authority means the authority appointed by the appropriate Government by notification in its Official Gazette to ascertain from time to time the cost of living index number applicable to the employees employed in the scheduled employment (i.e. employments specified in the Schedule to the Act) specified in such notification.. 6. Cost of living index number [Sec. 2 (d)] - Cost of living index number, in relation to employees in any scheduled employment in respect of which minimum rates of wages have been fixed, means the index number ascertained and declared by the competent authority by notification in the Official Gazette to be the cost of living index number applicable to employees in such employment. 7. Employer [Sec. 2 (e)] - Employer means any person who employs, whether directly or through another person, or whether on behalf of himself or any other person, one or more employees, in any scheduled employment in respect of which minimum rates of wages have been fixed under the Act. It includes: i) in a factory where there is carried on any scheduled employment in respect of which minimum rates of wages have been fixed under the Act, any person named as manager of the factory under Sec. 7 (1) (f) of the Factories Act, 1948;
ii) in any scheduled employment under the control of any Government in India in respect of which minimum rates of wages have been fixed under the Act, the person or authority appointed by such Government for the supervision and control of employees or where no person or authority is so appointed, the head of the department; iii) in any scheduled employment under any local authority in respect of which minimum rates of wages have been fixed under the Act, the person appointed by such authority for the supervision and control of employees or where no person is so appointed, the chief executive officer of the local authority; iv) in any other case where there is carried on any scheduled employment in respect of which minimum rates of wages have been fixed under the Act, any person responsible to the owner for the supervision and control of the employees or for the payment of wages. 8. Scheduled employment [Sec. 2 (g)] - It means an employment specified in the Schedule to the Act (reproduced below), or any process or branch of work forming part of such employment.
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3.4.4 The schedule [Sec. 2 (g) and 27] PART-I 1. Employment in any woolen carpet making or shawl weaving establishment. 2. Employment in any rice mill, flour mill or dal mill. 3. Employment in any tobacco (including bidi making) manufactory. 4. Employment in any plantation, that is to say, any estate which is maintained for the purpose of growing cinchona, rubber, tea or coffee. 5. Employment in any oil mill. 6. Employment under any local authority. 7. Employment on the construction or maintenance of roads or in building operations. 8. Employment in stone-breaking or stone-crushing. 9. Employment in any lace manufactory. 10. Employment in any public motor transport. 11. Employment in any mica works. 12. Employment in public motor transport. 13. Employment in tanneries and leather manufactory. 14. Employment in gypsum mines. 15. Employment in barytes mines. 16. Employment in bauxite mines. 17. Employment in manganese mines. 18. Employment in the maintenance of buildings and employment in the construction and maintenance of runways. 19. Employment in china clay mines. 20. Employment in kyanite mines. 21. Employment in copper mines. 22. Employment in clay mines covered under the Mines Act, 1952. 23. Employment in magnesite mines covered under the Mines Act, 1952. 24. Employment in white clay mines. 25. Employment in stone mines. 26. Employment in steatite (including the mines producing soapstone and tale). 27. Employment in ochre mines. 28. Employment in asbestos mines. 29. Employment in fire clay mines.
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30. Employment in chromite mines. 31. Employment in quartizite mines. 32. Employment in quartz mines. 33. Employment in silica mines. 34. Employment in graphite mines. 35. Employment in feldspars mines. 36. Employment in laterite mines. 37. Employment in dolomite mines. 38. Employment in redoxide mines. 39. Employment in wolfram mines. 40. Employment in iron ore mines. 41. Employment in granite mines. 42. Employment in rock phosphate mines. 43. Employment in hematite mines. 44. Employment in loading and unloading in: i) railways, goods sheds, ii) docks and ports. 45. Employment in marble and calcite mines. PART II 9. Employment in agriculture - that is to say, in any form of farming, including the cultivation and tillage of the soil, dairy farming, the production, cultivation, growing and harvesting of any agricultural or horticultural commodity, the raising of live-stock, bees or poultry, and any practice performed by a farmer or on a farm as incidental to or in conjunction with farm operations (including any forestry or timbering, operations and the preparations for market and delivery to storage or to market or to carriage for transportation to market of farm produce). 10. Wages [Sec.2 (h)]. Wages means all remuneration, capable of being expressed in terms of money, which would, if the terms of the contract of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or work done in such employment. It includes house rent allowance but does not include: i) the value of a) any house accommodation, supply of light, water, medical attendance, or b) any other amenity or any service excluded by general or special order of the appropriate Government; ii) any contribution paid by the employer to any Pension Fund or Provident Fund or under any scheme of social insurance;
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iii) any sum paid to the person employed to defray special expenses entailed on him by the nature of his employment; or v) any gratuity payable on discharge. 11. Employee [Sec. 2 (1)]. Employee means any person who is employed for hire or reward to do any work, skilled or unskilled, manual or clerical, in a scheduled employment in respect of which minimum rates of wages have been fixed. The term includes an out-worker to whom any articles or materials are given out by another person to be made up, cleaned, washed, altered, ornamented, finished, repaired, adapted or otherwise processed for sale for the purpose of the trade or business of that other person where the process is to be carried out either in the home of the out-worker or in some other premises not being premises under the control and management of that other person. The term also includes an employee declared to be an employee by the appropriate Government. It does not however include any member of the Armed Forces of the Union. 3.4.5 Fixation and Revision of Wages (Sec. 3 to 5) Fixing of minimum rates of wages (Sec.3) The responsibility for fixing the minimum rates of wages is that of the appropriate Government. Sec. 3 provides that the appropriate Government: a) shall fix the minimum rates of wages payable to employees employed in an employment specified in Part I or Part II of the Schedule (reproduced earlier) and in an employment added to either Part by notification in the Official Gazette [Sec.3(1)(a)]; b) may, in respect of employees employed in an employment specified in Part II of the Schedule, instead of fixing minimum rates of wages for the whole State, fix such rates for a part of the State or for any specified class or classes of such employment in the whole State or part thereof [Provison to Sec. 3 (1)(a)]; c) shall review at such intervals not exceeding 5 years, the minimum rates of wages so fixed and revise the minimum rates if necessary [Sec. 3 (1) (b)]. Minimum number of employees. The appropriate Government may refrain from fixing minimum rates of wages in respect of any scheduled employment in which there are in the whole State less than 1,000 employees engaged in such employment. But if at any time, the appropriate Government comes to a finding after an inquiry that the number of employees in any scheduled employment has risen to 1,000 or more, it shall fix minimum rates of wages payable as soon as may be after such findings [Sec. 3 (1-A)].
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Minimum rates. The appropriate Government may fix a) a minimum rate of wages for time work (referred to as a minimum time rate); b) a minimum rate of wages for piece work (referred to as a minimum piece rate); c) a minimum rate of remuneration to apply in the case of such employees employed on piece work for purpose of securing to such employees a minimum rate of wages on a time work basis (referred to as a guaranteed time rate); d) a minimum rate (whether a time rate or a piece rate) to apply in substitution for the minimum rate which would otherwise be applicable, in respect of overtime work done by employees (referred to as overtime rate) [Sec. 3 (2)]. Different minimum rates. In fixing or revising minimum rates of wages, different minimum rates of wages may be fixed for i ) different scheduled employments; ii) different classes of work in the same scheduled employment; iii) adults, adolescents, children and apprentices; iv) different localities [Sec. 3 (3) (a)]. Further in fixing or revising minimum rates of wages under Sec. 3, minimum rates of wages may be fixed by any one or more of the following wage-periods, namely: i) by the hour, ii) by the day, iii) by the month, or iv) by such other larger wage-period as may be prescribed. Where such rates are fixed by the day or by the month, the manner of calculating wages for a month or for a day, as the case may be, may be indicated [Sec. 3 (3)(b)]. Also where any wage-periods have been fixed under Sec.4 of the Payment of Wages Act, 1936 minimum wages shall be fixed in accordance therewith [Proviso to Sec. 3 (3) (b)]. Minimum rate of wages (Sec.4). Any minimum rate of wages fixed or revised by the appropriate Government in respect of scheduled employments under Sec.3 may consist of i) a basic rate of wages and a special allowance (hereinafter referred to as the cost of living allowance). The rate of cost of living allowance shall be adjusted at such intervals and in such manner as the appropriate Government may direct. The rate-shall accord as nearly as practicable with the variation in the cost of living index number applicable to such workers; or
ii) a basic rate of wages with or without the cost of living allowance, and the cash value of the concessions in respect of supplies of essential
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commodities at concessional rates, where so authorized; iii)an all inclusive rate allowing for the basic rate, the cost of living allowance and the cash value of the concessions, if any [Sec. 4 (1)]. The cost of living allowance and the cash value of the concessions in respect of supplies of essential commodities at concessional rates shall be computed by the competent authority. The computation shall be done by the competent authority at such intervals and in accordance with such directions as may be specified or given by the appropriate Government [Sec. 4 (2)]. Procedure for fixing and revising minimum wages (Sec. 5). Sec.5 provides 2 separate modes of procedure for fixing and revising minimum wages and the primary object of both the procedures is to enable the Government to reach a balanced conclusion with regard to fixation of a minimum wage. In one case a committee [Sec. 5 (1) (a)] is appointed and in the other a notification [Sec. 5 (1) (b)] is made and objections are invited [Mohan Bros. v. State, A.I.R. (1967) Punj. 491; P. Gangadharan v. State, A.I.R., (1968) Ker. 218]. The provisions of Sec.5 are summed up as follows: In fixing minimum rates of wages in respect of any scheduled employment for the first time or in revising minimum rates of wages so fixed, the appropriate Government shall follow either of the following 2 methods: a) Appointment of Committees The appropriate Government shall appoint as many committees and sub-committees as it considers necessary to hold inquiries and advise it in respect of fixation or revision of minimum rates of wages, as the case may be [Sec. 5 (1) (a)]; or b) Publication of proposals in the Official Gazette The appropriate Government shall, by notification in the Official Gazette, publish its proposals for the information of persons likely to be affected by the fixation or revision of minimum rates of wages. It shall also specify a date on which the proposals will be taken into consideration. The date so specified shall not be less than 2 months from the date of the notification [Sec.5 (1) (b)]. After considering the advice of the committee or committees [under Sec. 5 (1)(a)] or all representations received by it before the date specified in the notification [under Sec.5 (1) (b)], the appropriate Government shall, by notification in the Official Gazette, fix or revise the minimum rates of wages in respect of each scheduled employment. The fixation or revision shall come into force on the3 expiry of 3 months from the date of the issue of notification, unless the notification otherwise provides [Sec. 5 (2)]. The power of the Government under Sec.5 (2) to issue notification revising minimum wages includes power to give retrospective effect to notification [Mizar Govinda Annappa Pai & Sons v. State of Karnataka, (1986) Lab. I.C. 1555 (Kant.)].
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Consultation with Advisory Board. Where the appropriate Government proposes to revise the minimum rates of wages by the mode specified in Sec. 5 (1) (b), it shall also consult the Advisory Board (constituted under Sec. 7)[Proviso to Sec. 5 (2)]. Government not bound to accept the recommendation of the committee appointed under Sec. 5 (1) (a). A committee appointed under Sec. 5 (1) (a) is only an advisory body and the Government is not bound to accept its recommendation in every case [Management of All Tea Estates in Assam v. Indian National Trade Union Congress, A.I.R. (1957) S.C. 206]. Further any irregularity in the constitution of this committee or a procedure adopted by it cannot affect the validity of the notification issued by the appropriate Government under Sec. 5 (1) (b) [Edwards Mills Co. Ltd., Marwar v. State of Ajmer, A.I.R. (1955) S.C. 25]. If no advice is given by the committee or if inadequate advice is given, Sec. 5 does not deprive the appropriate Government of its power and duty to fix or revise the minimum rates of wages [Tourist Hotel v. State of A.P., (1975) 1 L.L.J. 211]. The notification of the Government that employees who are in receipt of higher wages than those fixed under the notification should continue to enjoy the same is not warranted by the provisions of the Act. The Government cannot convert a voluntary payment into a compulsory payment [Bengal Motion Picture Employees Union v. Kohinoor Pictures Pvt. Ltd. A.I.R. (1964) Cal. 519]. Correction of errors (Sec. 10). The appropriate Government may, at any time, by notification in the Official Gazette, correct clerical or arithmetical mistakes in any order fixing or revising minimum rates of wages under the Act, or errors arising therein from any accidental slip or omission [Sec. 10 (1)]. Every such notification shall, as soon as may be after it is issued, be placed before the Advisory Board (constituted under Sec. 7) for information [Sec. 10 (2)]. 3.4.6 Advisory Board and Central Advisory Board (Sec. 7 to 9 and 29) Advisory Board (Sec. 7). For the purpose of co-ordinations of the work of committees and sub committees appointed under Sec.5 and advising the appropriate Government generally in the matter of fixing and revising minimum rates of wages, the appropriate Government shall appoint an Advisory Board (Sec. 7). No procedure is prescribed in the Act for the Advisory Board to function. It can devise its own procedure [State of Rajasthan v. Hari Ram Nathwani, A.I.R. (1976) S.C. 277]. Composition of Committees and Advisory Board (Sec. 9) Each of the committees, sub-committees and the Advisory Board shall consist of persons to be nominated by the appropriate Government representing employers and employees in the scheduled employment, who shall be
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equal in number, and independent persons not exceeding 1/3rd of its total number of members. One of the independent persons shall be appointed the Chairman by the appropriate Government. Central Advisory Board (Sec. 8) The Central Government shall appoint a Central Advisory Board: a) or the purpose of advising the Central and State Governments in the matters of the fixation and revision of minimum rates of wages and other matters under the Act, and b) for coordinating the work of the Advisory Boards [Sec. 8 (1)]. Composition of the Central Advisory Board. It shall consist of persons nominated by the Central Government representing employers and employees in the scheduled employments, who shall be equal in number, and independent persons not exceeding 1/3rd of its total number of members. One of the independent persons shall be appointed the Chairman of this Board by the Central Government [Sec. 8 (2)]. According to Sec. 29, the Central Government may, subject to the condition of previous publication, by notification in the Official Gazette, make rules prescribing the term of office of the members, the procedure to be followed in the conduct of business, the method of voting, the manner of filling up casual vacancies in membership and the quorum necessary for the transaction of business of the Central Advisory Board. 3.4.7 Safeguards in Payment of Minimum Wages Wages in kind (Sec. 11) Minimum wages payable under the Act shall be paid in cash [Sec. 11 (1)]. But where it has been the custom to pay wages wholly or partly in kind, the appropriate Government may, by notification in the Official Gazette, authorize the payment of minimum wages either wholly or partly in kind [Sec. 11 (2)]. The appropriate Government may also by notification in the Official Gazette authorize the provision of the supply of essential commodities at concessional rates [Sec. 11 (3)]. The cash value of wages in kind 9 under Sec. 11 (2) and of concession in respect of supplies of essential commodities at concessional rates authorized under Sec. 11 (2) and (3) shall be estimated in the prescribed manner [Sec. 11 (4)]. Payment of minimum rate of wages (Sec. 12). Where in respect of any scheduled employment minimum wages have been fixed, the employer shall pay to every employee wages at a rate not less than the minimum rate of wages fixed or that class of employees in the employment. Such wages shall be paid without any deductions except as may be authorized. Where the contract rate of wages is higher, the statutory obligation does not come into play [Sec. 12 (1)]. Sec. 12 does not affect the provisions of the Payment of Wages Act, 1936 [Sec.2 (2)].
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Fixing hours for a normal working day, etc. (Sec. 13) In regard to any scheduled employment where minimum rates of wages have been fixed, the appropriate Government may: a) fix the number of hours of work which constitute a normal working day, inclusive of one or more specified intervals; b) provide for a day of rest in every period of 7 days and for payment of remuneration in respect of such day of rest; c) provide for payment for work on a day of rest at a rate not less than the overtime rate [Sec. 13 (1)]. Provisions of Sec. 13 (1) to apply subject to conditions. In relation to the following classes of employees, the provisions of Sec. 13 (1) shall apply only to such extent and subject to such conditions as may be prescribed: a) employees engaged on urgent work, or in any emergency which could not have been foreseen or prevented; b) employees engaged in work in the nature of preparatory or complementary work which must necessarily be carried on outside the limits laid down for the general working in the employment concerned; c) employees whose employment is essentially intermittent; d) employees engaged in any work which for technical reasons has to be completed before the duty is over; e) employees engaged in work which could not be carried on except ast times dependent on the irregular action of natural forces [Sec. 13 (2)]. Intermittent employment The employment of an employee is essentially intermittent when it is declared to be so by the appropriate Government. The appropriate Government declares an employment as intermittent on the ground that the daily hours of duty of the employee normally include periods of inaction during which the employee may be on duty but is not called upon to display either physical activity or sustained attention [Sec. 13 (3)]. Rates of overtime (Sec. 14) Where an employee, whose minimum rate of wags is fixed under this Act, by the hour, by the day or by such Extendeder wage-period as may be prescribed, works overtime, the employer shall pay him for every hour or for part of an hour so worked in excess, wages at the rates fixed for overtime work under the Act or under any law of the appropriate Government, whichever is higher [Sec. 14 (1)]. The provisions of the Minimum Wages Act, 1948 do not prejudice the operation of the provisions of Sec. 59 of the factories Act, 1948 in any case where those provisions are applicable [Sec. 14(2)]. Wages of worker who works for less than normal working day [Sec. 15] Some times an employee whose minimum rate of wages has been fixed
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by the day may work on any day on which he was employed for a period less than the requisite number of hours constituting a normal working day. In that case he is entitled to receive wages in respect of work done by him on that day as if he had worked for a full normal working day except 1) where his failure to work is caused by his unwillingness to work and not by omission of the employer to provide him with work and 2) in such other cases and circumstances as may be prescribed. Wages for two or more classes of work [Sec. 16] Where an employee does two or more classes of work to each of which a different minimum rate of wages is applicable, the employer shall pay to such employee in respect of the time respectively occupied in each such class of work, wages at not less than the minimum rate in force in respect of each such class. Minimum time rate wages for piece work [Sec.17] Where an employee is employed on piece work for which minimum time rate and not a minimum piece rate has been fixed under the Act, the employer shall pay to such employee wages at not less than the minimum time rate. 3.4.8 Maintenance of registers and records [Sec.18] Every employer shall maintain registers and records giving particulars of employees employed by him, the work performed by them, the wages paid to them, the receipts given by them and such other particulars as may be prescribed [Sec. 18(1)]. He shall also keep exhibited notices in the prescribed form containing prescribed particulars in the prescribed manner in the factory, workshop or place where the employees in the scheduled Employment may be employed. In the case of out-workers, he shall keep these notices exhibited in such factory, workshop or place as may be used for giving out-work to them [Sec.18 (2)]. The appropriate Government may, by rules made under the Act, provide for the issue of wage books or wage slips to employees employed in any scheduled Employment in respect of which minimum rates of wages have been fixed. It may also prescribe the manner in which entries shall be made and authenticated in such wage books or wage slips by the employer or his agent [Sec. 18(3)]. 3.4.9 Enforcement of the Act [Secs.19 to 21] Inspectors [Sec. 19] The appropriate Government may, by notification in the official Gazette appoint Inspectors for the purposes of the Act, and define the local limits within which they shall exercise their functions [Sec. 19(1)]. The powers and functions of the Inspectors so appointed are almost similar to those of the Inspectors appointed under the Payment of Wages Act, 1936. The Inspectors have to see that the provisions of the Minimum Wages
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Act are complied with. The words local limits in Sec. 19(1) do not exclude appointment of Inspector for the whole of the State [P.N.Dubey v. state of U.P.(1978) F.L.R.334, a case decided under Sec. 8(1) of the Factories Act, 1948]. Powers of Inspectors : An Inspector may a) enter at all reasonable hours, with such assistants as he things fit, any premises or place where employees are employed or work is given out to out-workers in any scheduled Employment in respect of which minimum rates of wages have been fixed, for the purpose of examining any register, record of wages or notices required to be kept or exhibited by or under the Act or rules made there under, and require the production thereof for inspection; b) examine any person whom he finds in any such premises or place and who, he has reasonable cause to believe, is an employee employed therein or an employee to whom out-work is given; c) require any person giving out-work and any out-workers, to give any information, which is in his power to give, with respect to the names and addresses of the persons to, for and from whom the work is given out or received, and with respect to the payments to be made for the work; d) seize or take copies of such register, record of wages or notices as he may consider relevant in respect of an offence under the Act which he has reason to believe has been committed by an employer; and e) exercise such other powers as may be prescribed [Sec. 19(2)]. Any person required to produce any document or thing or to give any information by an Inspector under Sec. 19(2) shall be deemed to be legally bound to do so within the meaning of Secs. 175 and 176 of the Indian Penal Code, 1860 [Sec. 19(4)]. Every Inspector shall be deemed to be a public servant within the meaning of the Indian Code, 1860 [Sec. 19(3)]. 3.4.10 Claims The appropriate Government may, by notification in the official Gazette, appoint an Authority to hear and decide for any specified area all claims a) arising out of payment of less than the minimum rates of wages, or b) in respect of payment of remuneration for the days of the rest [under Sec. 13(1)(b)] or for work done of rest [under Sec. 13(1)(c)]; or c) in respect of wages at the overtime rate [under Sec. 14] to employees Employment or paid in that area [Sec. 20(1)] Who may be an Authority under the Act? The Authority under the Act may be i ) any Commissioner for Workmens Compensation or ii) any officer of the Central Government exercising functions as a Labour Commissioner for any region
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or iii) any officer of the State Government not below the rank of a Labour Commissioner or iv) any other officer with experience as a Judge of the Civil Court or as a Stipendiary Magistrate [Sec. 20(1)] Who may apply? Where an employee has any claim, any of the following persons may apply to the Authority for hearing and deciding the case: i) the employee himself or ii) any legal practitioner or iii) any official of a registered Trade Union authorized in writing to act on his behalf or iv) any Inspector or v) any person acting with the permission of the Authority [Sec. 20(2)]. When an application under Sec. 20(2) is filed by a person other than the employee, the Authority must inquire into the competence of such a person to file the same [A.P.State Handloom Weavers Co-op. Society v. Authority under the Minimum Wages Act, (1966), 1 L.L.N. 934 (A.P.)]. The plea that an Inspector filing an application under Sec. 20(2) is not validly appointed is not maintainable when it is not shown that any substantial injury or failure of justice has resulted thereby [Ajanta Talkies , Allahabad v. Dy. Labour Commr., (1979) Lab. I.C. 659]. Every application under Sec. 20(2) shall be presented within 6 months from the date on which the minimum wages or other amount became payable [Proviso 1 to Sec. 20(2)]. it may be admitted after 6 months when the applicant satisfies the Authority that he had sufficient cause for not making the application within such period [Proviso 2 to Sec. 20(2)]. Amount of compensation, When any application is entertained, the Authority shall hear the applicant and the employer or give them an opportunity of being heard. After such further inquiry, if any, as it may consider necessary, the Authority may direct i) in the case of a claim arising out of payment of less than the minimum rates of wages, the payment to the employee of the amount by which the minimum wages payable to him exceed the amount actually paid, together with the payment of such compensation as the Authority may think fit, not exceeding 10 times the amount of such excess; ii) in any other case, the payment of the amount due to the employee, together with the payment of such compensation as the Authority may think fit, not exceeding Rs.10.
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The Authority may direct payment of such compensation in cases where the excess or the amount due is paid by the employer to the employee before the disposal of the application. The discretion of the Authority under Sec. 20(3) to award compensation is without prejudice to any other penalty to which the employer may be liable under the Act, [Sec. 20(3)]. Any amount directed to be paid under Sec. 20 may be recovered by the Authority as if it were a fine imposed by the Authority as a magistrate [Sec.20 (5)], Every direction of the Authority under Sec. 20 shall be final [Sec. 20(6). Malicious or vexatious application. If the authority hearing any application is a satisfied that it was either malicious or vexatious, it may direct that a penalty not exceeding Rs. 50 be paid to the employer by the person presenting the application [Sec. 20(4)]. Powers of the Authority. The Authority shall have all the powers of a Civil Court under the Code of Civil Procedure, 1908, for the purpose of i) taking evidence, ii) enforcing the attendance of witnesses and iii) compelling the production of documents. Every such Authority shall be deemed to be a Civil court for all the purpose of Sec. 195 and Chapter XXXV of the Code of Criminal Procedure, 1898 (now 1973) [Sec.20(7)] Single application in respect of a number of employees. (Sec. 21). Subject to such rules as may be prescribed, a single application may be presented under Sec. 20 on behalf or in respect of any number of employees employment in respect of which minimum rates of wages have been fixed. In such cases, the maximum compensation which may be awarded under Sec. 20(3) shall not exceed 10 times the aggregate amount of such excess or Rs.10 per head, as the case may be [Sec.21(1)]. The Authority may deal with any number of separate pending applications presented under Sec. 20 in respect of employees in the scheduled employment (in respect of which minimum rates of wages have been fixed), as a single application presented under Sec. 21(1) and the provisions of sec. 21(1) shall apply accordingly [Sec.21 (1) and the provisions of Sec. 21 (1) shall apply accordingly [Sec. 21(2)]. 3.4.11 Offences and Penalties Penalties for certain offences [Sec. 22] Any employer who a) pays to any employee less than the minimum rates of wages fixed for that employees class of work, or less than the amount due to him under the provisions of the Act
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or b) contravenes any rule or order made under Sec. 13 shall be punishable with imprisonment for a term which may extend to 6 months, or with fine which may extend to Rs500 or with both [Sec.22] In imposing any fine for an offence under Sec. 22, the Court shall take into consideration the amount of any compensation already awarded against the accused in any proceedings taken under Sec. 20 (Proviso to Sec. 22) General provision for the punishment of other offences [Sec.22A] Any employer who contravenes any provision of the Act or of any rule or order made there under shall, if no other penalty is provided for, such contravention by the act, be punishable with fine which may extend to Rs.500. Cognizance of offences [Sec.22B] No court shall take cognizance of a complaint against any person for an offencea) involving payment of less than the minimum wages unless an application in respect of the facts constituting such offence has been duly presented under Sec. 20 and granted and the appropriate Government or an officer authorized by it in this behalf has sanctioned the making of the complaint; b) involving contravention of any rule or order made under Sec.13 or sec.22A except on a complaint made by, or with the sanction of, an Inspector [Sec.22B(1)] Further, no court shall take cognizance of an offence a) under Sec. 22 unless complaint thereof is made within 1 month of the grant of sanction under Sec. 22B b) under Sec.22A unless complaint thereof is made within 6 months of the date on which the offence is alleged to have been committed [Sec.22B(2)] Offences by companies [Sec.22C] If the person committing any offence under the Act is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly [Sec.22C (1)]. Such person shall not be liable to any punishment provided in the Act if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence [Proviso to Sec. 22-C(1)]. Further where in offence under the Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer of the company shall also be deemed to be
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guilty of that offence and shall be liable to be proceeded against and punished accordingly [Sec. 22C (2)]. For the purposes of Sec. 22C a) company means any body corporate and includes a firm or other association of individuals and b) director in relation to a firm means a partner in the firm [Explanation to Sec. 22C). 3.4.12 Miscellaneous Payment of un-disbursed amounts due to employees [Sec. 22D] All amounts payable by an employer to an employee as the amount of minimum wages or otherwise due to the employee under the Act shall de deposited with the prescribed authority if such amounts could not or cannot be paid to the employee: i) on account of his death before payment or The prescribed authority shall deal with the money so deposited in such manner as may be prescribed. Protection against the attachment of assets of an employer with the Government [Sec.22E] Any amount deposited with the appropriate Government by an employer to secure the due performance of a contract with that Government and other amount due to such employer from that Government in respect of such contract shall not be liable to attachment under any decree or order of any court in respect of any debt or liability incurred by the employer other than any debt or liability incurred by the employer towards any employee employed in connection with the contract aforesaid. Application of Payment of Wages Act, 1938 to scheduled employments [Sec. 22F] Not withstanding anything contained in the Payment of Wages Act, 1936 the appropriate Government may, be notification in the official Gazette, direct that all or any of the provisions of the said Act shall apply to wages payable to employees in such scheduled employments as may be specified in the notification [Sec. 22-F(1)]. Where all or any of the provision of the payment of Wages Act, 1938 are applied to wages payable to employees in any scheduled employment under Sec. 22F (1).the Inspector appointed under the Minimum Wages Act shall be deemed to be Inspector for the purpose of enforcement of the provisions so applied within the local limits of his jurisdiction [Sec. 22-F(2)]. Exemption of the employer from liability in certain cases [Sec.23] Where an employer is charged with an offence against this act, he shall be excused from liability if he can show that some other person was responsible for the offence and that
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ii) on account of his whereabouts not being known
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a) he has used due diligence to enforce the execution of the Act; and b) the said other person committed the offence in question without his knowledge consent or connivance. In such a case, the other person shall be convicted of the offence and shall be liable to the punishment as if he was the employer and the employer shall be discharged [Sec.23]. In seeking to prove as aforesaid, the employer may be examined on oath, and the evidence of the employer or his witness, if any, shall be subject to cross-examination by or on behalf of the person whom the employer charges as t he act u al o ffender and by t he p ro secut io n [proviso to Sec. 23] Bar of suits [Sec.24] No court shall entertain any suit for the recovery of wages in so far as the sum so claimed a) forms the subject of an application under Sec. 20 which has been presented by or on behalf of the plaintiff on b) has formed the subject of a direction under Sec. 20 in favour of the plaintiff or c) has been adjudged in any proceeding under Sec. 20 not to be due to the plaintiff or d) could have been recovered by an application under Sec. 20. Contracting out (Sec.25) Any contract or agreement, whether made before or after the commencement of the Act, whereby an employee either relinquishes or reduces his right to a minimum rate of wages or any privilege or concession accruing to him under the Act shall be null and void in so far as it purports to reduce the minimum rate of wages fixed under the Act. Exemptions and exceptions (Sec. 26) The appropriate Government may1) direct that the provisions of this Act shall not apply in relation to the wages payable to disabled employees [Sec. 26(1)] 2) exempt by notification in the Official Gazette some specified scheduled employments from the application of some or all of the provisions of the Act. [Sec.26 (2)]. 3) direct that the provisions of the Act shall not apply to the wages payable by an employer to a member of his family who is living with him and is dependent on his [Sec.26(3)]. A member of the employers family in this regard is deemed to include his or her spouse or child or parent or brother or sister [Explanation to Sec. 26(3)].
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The appropriate Government may, having regard to the terms and conditions of service applicable to any class of employees in a scheduled employment generally or in a scheduled employment in a local area, direct, by notification in the Official Gazette, that the provisions of this Act or any of them shall not apply in relation to such employees, if they are in receipt of wages exceeding the prescribed limit [Sec.26 (2-A)]. Power of the appropriate Government to add to schedule (Sec. 27) If the appropriate Government intends to add to the Schedule any employment in respect of which it is of opinion that minimum rates of wages should be fixed, it must give by notification in the Official Gazette not less than 3 months notice of its intention so to do. After that the appropriate Government may, by like notification in the Official Gazette, add to the Schedule the employments in respect of which it is of opinion that minimum rates of wages should be fixed. Power of the Central Government to make rules [Secs. 29 and 30A] The Central Government may, subject to the condition of previous publication, by notification in the Official Gazette, make rules prescribing the term of office of the members, the procedure to be followed in the conduct of business, the method of voting, the manner of filling up casual vacancies in membership and the quorum necessary for the transaction of business of the Central Advisory Board [Sec. 29] Rules to be laid before Parliament [Sec. 30A]. Every rule made by the Central Government under this act shall be laid as soon as may be after it is made before each House of Parliament while it is in session for a total period of30 days. This period of 30 days may be comprised in one session or in 2 or more successive sessions. If both Houses agree in making any modification in the rule, the rule shall thereafter have effect only in the modified form. If both Houses agree that the rule should not be made, the rule shall thereafter have no effect. But any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule. Power of the appropriate Government to make rules [Sec. 30] The appropriate Government may, subject to the condition of previous publication, by notification in the Official Gazette, make rules for carrying out the purpose of the act. Objective Questions : 1. _______________ means a person who has completed his 14th year of age but not completed his 18th year. a. child a. True b. adolescent b. False
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c. person d. adult
2. Child means a person who has not completed his 14th year of age.
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Short Questions : 3. Define the Minimum Wages. 4. What are the roles played by the advisory boards in wage fixation? 5. How are claims processed in the Minimum Wages Act? Extended Questions : 6. Discuss about the procedures in fixation and revision of minimum wages. 7. Explain how the Payment of Minimum Wages can be safe guarded in the Minimum Wages Act. 8. Discuss about the enforcement procedures in the Minimum Wages Act. Summary Payment of the Minimum Wages Act is exclusively enacted to protect the interest and rights of the workers who work in the very lowest class. This Act will encompass the workers to lead their life with guaranteed assurance, given by the employer by the enactment of the government. The records and its maintenance will be the safest documents for the basic claims for the workers. The monitoring is possible by the enforcement wing consisting of Inspectors appointed for enforcing the Minimum Wages. The Claims for wrong deductions can be reclaimed the provisions of the Minimum Wages Act. 3.5 The Industrial Disputs Act, 1947
3.5.1 Introduction of the Industrial Disputes Act, 1947 The first enactment dealing with the settlement of industrial disputes was the Employers and Workmens (Disputes) Act, 1860. This Act weighed much against the workers and was therefore replaced by the Trade Disputes Act, 1929. The Act of 1929 contained special provisions regarding strikes in public utility services and general strikes affecting the community as a whole. The main purpose of the Act, however, was to provide a conciliation machinery to bring about peaceful settlement of industrial disputes. The Whitely Commission made in this regard the perceptive observation that the attempt to deal with unrest must begin rather with the creation of an atmosphere unfavorable to disputes than with machinery for their settlement. The Act came into force on the first day of April, 1947 (Sec. 1 (3)]. 3.5.2 Learning Objectives After studying this unit you should be able to:

Understand the definitions in Industrial Disputes Act. Determine the objectives of the Act. Know the definitions of Industry before amendments and after amendments.
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Study the different causes for Industrial Disputes. Know the meaning of unfair labour practices. Reference of certain Individual Disputes to Grievance Settlement Authorities. Procedure for Settlement of Industrial Disputes and Authorities under the Act. Know the Conciliation Machinery.
3.5.3 Object of the Act: The main objects of the Act are:1) to secure industrial peace: a) by preventing and settling industrial disputes between the employers and workmen. b) by securing and preserving amity and good relations between the employers and workmen through an Internal Works Committee, and c) by promoting good relations through an external machinery of conciliation, Courts of Inquiry, Labour Courts, Industrial Tribunals and National Tribunals. 2) to ameliorate the condition of workmen in industry: a) by redressal of grievances of workmen through a statutory machinery, and b) by providing job security [S.N. Ravi v. Vishwanath Lal, A.I.R. (1960) Pat. 10]. Extent of the Act The Act extends to the whole of the India [Sec. 1 (2)]. It applies to all industries whether they be carried on by private owners or by the Government [Western India Automobile Assn. v. Industrial Tribunal, Bombay, A.I.R. (1949) F.C. 111]. The Act has been amended from time to time. The latest amendment to the Act was made in August, 1984. 3.5.4 Definition of Industry In Bangalore Water Supply & Sewerage Board v. A. Rajappa, A.I.R., (1978) S.C. 548, a judgment of far-reaching importance, a seven-judge Bench of the Supreme Court gave a wide amplitude to the meaning of the term industry so as to bring within its scope clubs, educational and research institutions and charitable projects. The issue before the Court was whether the activities of institutions ranging from the Bangalore Water Supply and Sewerage Board to the Gandhi Ashram were such as to come within the scope of the term industry as defined in Sec. 2 (j) of the Industrial Disputes Act, 1947. While defining the scope of the term industry (in Sec. 2 (i), the Supreme Court overruled the decisions given earlier in the cases relating to the
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Safdarjung Hospital, Gymkhana Club, Delhi University and Dhanrajgiri Hospital, and observed: Any systematic activity organized or arranged in a manner in which trade or business was generally organized or arranged would be an industry even if it proceeded from charitable motives. It was the nature of the activity that had to be considered and it was upon the application of that test that even the States inalienable functions fell within the definition of industry. The Amendment Act of 1982 has re-defined the term industry in the light of the observations of the Supreme Court in the case of Bangalore Water Supply & Sewerage Board, etc. v. A. Rajappa, (1978) Lab. I.C. 467. The definition has now been made wider and more specific. According to new Sec. 2 (i) as substituted by the Amendment Act of 1982, industry means any systematic activity carried on by co-operation between an employer and his workmen. The workmen may be employed by the employer directly or by or through any agency, including a contractor. The employment should, however, be for the production, supply or distribution of goods or services with a view to satisfy human wants or wishes (not being wants or wishes which are merely spiritual or religious in nature). It makes no difference whether or not: i) any capital has been invested for the purpose of carrying on the activity referred to above or What is included in the term industry? Industry includes: a) any activity of the Dock Labour Board established under Sec. 5-A of the Dock Workers (Regulation of Employment) Act, 1948; b) any activity relating to the promotion of sales or business or both carried on by an establishment. What is not included in the term industry? Industry does not include: 1) any agricultural operation except where such agricultural operation is carried on in an integrated manner with any other systematic activity and such other activity is the predominant one or Agricultural operation does not include any activity carried on in a plantation as defined in Sec. 2 (f) of the Plantation Labour Act, 1951. 2) Hospitals or dispensaries or 3) Educational, scientific, research or training institutions; 4) Institutions owned or managed by organizations wholly or substantially engaged in any charitable, social or philanthropic service; or
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ii) such activity is carried on with a motive to make any gain or profit.
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5) Khadi or village industries; or According to new clause as introduced in Sec. 2 by the Amendment Act of 1982, khadi has the meaning assigned to it in Sec. 2 (d) of the Khadi and Village Industries Commission Act, 1956. 6) any activity of the Government relatable to the sovereign functions of the Government including all the activities carried on by the departments of the Central Government dealing with defense research, atomic energy and space or 7) any domestic service or 8) any activity, being a profession practiced by an individual or body of individuals, if the number of persons employed in relation to such profession is less than 10 or 9) any activity, being an activity carried on by a co-operative society or a club or any other like body of individuals, if the number of persons employed in relation to such activity is less than 10. 3.5.5 Definition of industry before the amendment in 1982. The definition of the term industry has been amended by the Amendment Act of 1982 but the Amendment has not yet been brought into force. Prior to amendment in 1982, the definition of the term industry (which still continues to be effective) was as follows: Industry means any business, trade, undertaking, manufacture or calling of employees and includes any calling, service, employment, handicraft, or industrial occupation or avocation of workmen. 3.5.6 What is an Industrial Dispute? An Industrial dispute means any dispute or difference between: i) employers and employees, ii) employers and workmen or iii) workmen and workmen, which is connected with (a) the employment or non-employment (b) the terms of employment or (c) the conditions of labour of any person. Real and substantial difference. The term industrial dispute connotes a real and substantial difference having some element of persistency and continuity till resolved and is likely, if not resolved, to endanger the industrial peace of the undertaking or the community. When parties are
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at variance and the dispute or difference is connected with employment or non-employment or the terms of employment or with the conditions of labour, there comes into existence an industrial dispute [Shambhu Nath Goyal v. Bank of Baroda, (1978) 2 S.C.C. 353]. The expression terms of employment would ordinarily include only the contractual terms and conditions but those terms which are understood and applied by the parties in practice or habitually or by common consent without ever being incorporated in the contract are also included [Workmen v. Hindustan Lever Ltd., (1984) 1 S.C.C. 392]. Three ingredients of industrial dispute. In the ordinary language an industrial dispute is implied to mean a dispute between the workmen and the management. In Standard Vacuum refining Co. of India Ltd. v. Their Workmen, A.I.R. (1960) S.C.948, it was held that a dispute as to whether the system of engaging contract labour prevailing in certain sections of an industrial concern should be discontinued and the contractors labourers should be made workmen of the company is an industrial dispute, if it is taken up and sponsored by the regular workmen of the concern, it was observed in this case. : The definition of the Industrial dispute in Sec. 2(k) of the Industrial Dispute Act, 1947 has three ingredients, and if all three ingredients are satisfied, the dispute raised is an Industrial dispute which could validly be referred under Sec. 10 to a Tribunal for adjudication. These three ingredients are a) there should be real and substantial dispute or difference; b) the dispute or difference should be between employer and his workmen; and c) the dispute or difference must be connected with the employment or non-employment or terms of employment, or with the conditions of labour of any persons. Limitations of definition: contains two limitations: The definition of industrial dispute
First, the adjective industrial relates the dispute to an industry as defined in the Act, and Secondly the definition expressly states that not disputes and differences of all sorts but only those which bear upon the relationship of employers and workmen and the terms of employment or non-employment and the conditions of labour are contemplated. Test of industrial dispute: A dispute is an industrial dispute only when it arises in any activity which is an industry as defined in Sec. 2(1) of the Act. [D.N.Banerji v. P.R.Mukherjee, A.I.,R.(1963) SC 58]. The real test whether a dispute is an industrial dispute or not is whether the majority or a large number of workmen are involved in the dispute. An individual dispute between a employer and one of his workmen is by itself not an industrial dispute which can be referred to under Sec. 10. But such dispute may become an industrial dispute, provided that the cause of the particular workman concerned is taken up by a majority of
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workmen in the particular industrial establishment, or by any union of such workmen [Express Newspapers (pvt) Ltd. v. First Labour Court, A.I.R. (1959) Cal. 265). It makes no difference even if the union which takes up the cause of the dismissed workman itself comes into existence after the date of dismissal and the dismissed workman joins the union therafter; the dispute in such a case would be a valid industrial dispute [Workmen of Jamadoba Collery of Tata Iron & Steel Co. v. Jamadoba Colliery of Tata Iron & Steel Co. (1967) 2 L.L.J. 622]. But where the cause of a workman is espoused by a union which has absolutely nothing to do with the establishment from which the workman comes, it is not an industrial dispute [Motor & Machinery Mfrs. v. Industrial Tribunal, (1963) I.L.L.J. 222]. Individual and collective disputes The industrial disputes may be (1) individual disputes, or (2) collective disputes. Sec.2A provides that where any employer discharges, dismisses, retrenches or otherwise terminates the services of an individual workman any dispute or difference between that workman and his employer connected with or arising out of, such discharge, dismissal retrenchment or termination shall be deemed to be an industrial dispute even if no other workman nor any union of workmen is a party to the dispute. A collective dispute may relate to any of the following matters: a) Wages, bonus, profit-sharing, gratuity compensatory and other allowances. b) Hours of work leave with wages, holidays c) Rules of discipline, retrenchment of workmen, closure of establishment, rationalization. All collective disputes are industrial disputes. 3.5.7 Definitions Appropriate Government [Sec. 2 (a)] Appropriate Government means the Central Government in relation to any industrial dispute concerning 1) any industry carried on (i) by or under the authority of the Central Government or (ii) by a railway company or (iii) concerning any such controlled industry as may be specified in this behalf by the Central Government. 2) (a) a Dock Labour Board established under Sec. 5A of the Dock Workers (Regulation of Employment]Act, 1948 or b) the Industrial Finance Corporation of India established under Sec. 3 of the Industrial Finance Corporation Act, 1948
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or c) the Employees state Insurance Corporation established under Sec. 3 of the Employees State Insurance Act, 1948 or d) the Board of Trustees constituted under Sec. 3A of the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 or e) the Central Board of Trustees and state Boards of Trustees constituted under Sec. 5A and sec. 5B respectively, of the Employees Provident Funds and Miscellaneous Provisions act, 1952 or f) the Indian Airlines and Air India Corporations established under Sec. 3 of the Air Corporations Act, 1952 or g) the Life Insurance Corporation of India established under Sec. 3 of the Life Insurance Corporation Act, 1956 or h) the Oil and Natural Gas Commission established under Sec. 3 of the Oil and Natural Gas Commission Act, 1959 or i) the deposit Insurance and Credit Guarantee Corporation established under Sec. 3 of the Deposit Insurance and credit Guarantee Corporation act, 1961 or j) the Central Warehousing Corporation established under Sec. 3 of the Warehousing Corporations act, 1962 or k) the Unit Trust of India established under Sec. 3 of the Unit Trust of India Act, 1963, l) the Food Corporation of India established under Sec. 3 or a Board of Management established for 2 or more contiguous States under Sec. 16 of the Food Corporation Act, 1964 or m) the International Airports Authority of India constituted under Sec. 3 of the International Airports Authority of India Act, 1971 or n) a Regional Rural Bank established under Sec. 3 of the Regional Rural Banks act, 1976 or o) the Export Credit and Guarantee Corporation Limited or p) the Industrial Reconstruction Bank of India
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or q) the Banking Service Commission established under Sec. 3 of the Banking service Commission Act, 1975 or r) a banking or an Insurance Company or s) a mine, an oilfield, a Cantonment Board or a major port. In relation to any other industrial dispute, the appropriate Government means the State Government. In case of a Union Territory, there is no difference between the State Government and the Central Government (National Bldgs. Construction Corpn. Ltd. New Delhi, v. M.K.Jain (1981) Lab. I.C. 62]. 2. Average pay [Sec. 2 (aaa)]. It means the average of the wages payable to a workman: i) in the case of a monthly paid workman, in the 3 complete calendar months. ii) in the case of a weekly paid workman, in the 4 complete weeks and iii) in the case of a daily paid workman, in the 12 full working days. This period of 3 months, 4 weeks and 12 working days must precede the date on which the average pay becomes payable to the workman, provided he had worked during this period as the case may be. Where such calculation cannot be made, the average pay shall be calculated as the average of the wages payable to the workman during the period he actually worked. 3. Award [Sec. 2 (b)]. It means an interim or a final determination of any industrial dispute or of any question relating thereto by any Labour Court, Industrial Court, Industrial Tribunal or National Tribunal. It also includes an arbitration award made under Sec. 10A. 4. Board [Sec. 2 (c)]. Board means a Board of Conciliation constituted under the act. 5. Closure [Sec. 2 (cc)]. It means the permanent closing down of a place of employment or part thereof. 6. Conciliation officer [Sec. 2(d)]. Conciliation officer means a conciliation officer appointed under the Act. 7. Conciliation proceeding [Sec. 2(e)]. It means any proceeding held by a conciliation officer or Board of Conciliation under the Act. 8. Controlled industry [Sec. 2(ee)]. It means any industry the control of which by the Union has been declared by any Central Act to be expedient in the public interest. 9. Court [Sec. 2 (f). It means a Court if Inquiry constituted under the Act. 10. Employer [Sec. 2 (g)]. Employer in relation to an industry carried on by or under the authority of any department of the Central Government or a State Government means the authority prescribed in this behalf.
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Where no authority is prescribed, the employer means the head of the department carrying on the industry. But in relation to an industry carried on by or on behalf of a local authority. Employer means the chief executive officer of the authority. This definition of employer is neither exhaustive nor conclusive. it extends to all industrial undertakings and not merely to those run by Governments or local authorities [Bombay province v. Western India Automobile Assn., A.I.R. (1949) Bom. 141] In Sholapur Spg. & Wvg. Co. v. Maruf, (1958) 2 L.L.J. 123, it was held that the term employer includes among others, an agent of an employer, general manager, director and occupier of a mill. 11. Executive and office bearer in relation to a trade union [Sec. 2 (gg) and Sec. 2 (iii). Executive in relation to a trade union means the body, by whatever name called, to which the management of the affairs of the trade union is entrusted [Sec. 2 (gg) Office bearer in relation to a trade union, includes any member of the executive thereof, but does not include an auditor [Sec.2(iii)] 12. Independent person [Sec. 2 (i)]. A person shall be deemed to be independent for the purpose of his appointment as the Chairman or other member of Board of Conciliation, court of Inquiry or Industrial Tribunal if he is unconnected with the Industrial dispute referred to such Board of Conciliation, Court of Inquiry or Industrial Tribunal or with any industry directly affected by such dispute. No person shall cease to be independent by reason only of the fact that he is a shareholder of an incorporated company which is connected with, or likely to be affected by, such industrial dispute; but in such a case, he shall disclose to the appropriate Government the nature and extent of the shares held by him in such company. 13. Industrial establishment or undertaking [Sec. 2(ka)]. It means an establishment or undertaking in which industry is carried on. Some times several activities maybe carried on in an establishment or undertaking and only one or some of such activities is or is an industry or industries. a) In such a case if any unit of such establishment or undertaking carrying on any activity, being an industry, is severable from the other unit or units of such establishment or undertaking, such unit shall be deemed to be a separate industrial establishment or undertaking. b) If the predominant activity or each of the predominant activities carried on in such establishment or undertaking or any unit thereof is an industry and the other activity or each of the other activities carried on in such establishment or undertaking or unit thereof is not severable from and is, for the purpose of carrying on, or aiding the carrying on of, such predominant activity or activities, the entire establishment or undertaking or, as the case may be, unit thereof shall be deemed to be an industrial establishment or undertaking. 14. Labour Court [Sec. 2 (kkb)]. It means a Labour Court constituted under Sec.7
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15. Lay off [Sec.2 (kkk). Lay off means the failure, refusal or inability of an employer to give employment to a workman(a) whose name is borne on the muster-rolls of his industrial establishment, and (b) who has not been retrenched. The failure, refusal, or inability to give employment may be due to: 1) shortage of coal, power or raw materials or 2) the accumulation of stocks or 3) the breakdown of machinery or 4) natural calamity or for any other connected reasons Essentials of lay off. The essentials of a lay-off are as follows: a) There must be failure or refusal or inability of the employer to continue employees in his employment. b) The employees laid off must be on the muster-rolls of the establishment on the day of lay-off. c) The failure, refusal or inability to give employment may be due to shortage of raw materials or accumulation of stocks or breakdown of machinery or natural calamity or some other reason. d) The employees must not have been retrenched 16. Lock-out [Sec. 2(i). It means the temporary closing of a place of employment, or the suspension of work, or the refusal by an employer to continue to employ any number of persons employed by him. The word temporary was added to the definition by the Amendment Act of 1982. Essentials of a lock-out. The essentials of a lack-out are as follows: a) There is a temporary closing of the place of employment, or suspension or withholding of the work by the employer in some form, b) There is an element of demands for which the place of employment is locked-out or closed. c) There is an intention to re-employ the workers if they accept the demands. Lock out is employers weapon. In Karibetta Estate v. Rajamanickam, A.I.R. (1960) S.C.893, the Supreme Court observed: Lock out can be described as the antithesis of a strike. Just as a strike is a weapon available to the employees for enforcing their industrial demands, a lock out is a weapon available to the employer to persuade by a coercive process the employees to see his point of view to accept his demands. In a tussle between employees and an employer, whereas, strike is the weapon of the employees. lock out is the corresponding weapon in the
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armory of the employer. If the employer shuts down his place of business as a means of reprisal or as an instrument of coercion or as a mode of exerting pressure on the employees, or generally speaking, when his act is what may be called an act of belligerency, there would be a lock-out [Sri Ramachandran Spg. Mills v. State of Madras, A.I.R. (1956) Mad. 241]. Difference between lock-out and lay-off. 1) Under lock-out the employer refuses to give employment because of closing of a place of employment or suspension of work. Under lay-off the employer refuses to give employment because of shortage of coal, power or raw materials or the accumulation of stocks or the breakdown of machinery or natural calamity or for any other reason to give employment. 2) Lock-out is resorted to by the employer to coerce or pressurize the workmen to accept his demands; lay-off is for trade reasons beyond the control of the employer. 3) Lock-out is due to an industrial dispute and continues during the period of dispute; lay-off is not concerned with a dispute with the workmen. Difference between lock-out and closure. Lock-out and closure of a business are often confused. This is because cessation of work is common to both. Closure is a fundamental right and if it is not a lock-out, the workers cannot grudge [J.K. Hostery Factory v. Labour Appellate Tribunal, A.I.R. (1956) All. 498]. The State cannot compel an employer to carry on his business because several employees may be thrown out of employment if it is closed. The grounds for closure of a business may be actual loss or apprehended loss. It may also be disinclination to run the risk of running the business [Indian Metal & Metallurgical Corpn. v. Industrial Tribunal, Madras, 3 F. J.R. 420, High Court, Madras]. The points of difference between a lock-out and closure are as follows: 1) In the case of lock-out it is only the place of business which is closed (and not the business itself), while in the case of closure of a business not only the place of business but the business itself is closed [Express Newspapers (Pvt.) Ltd. v. Their Workmen, A.I.R. (1963) S.C. 569]. The closure of a business indicates the final and irrevocable termination of the business itself. Lock-out, on the other hand, indicates the closure of the place of business or the place of employment and not the closure of the business itself. 2) Lock-out is a weapon of coercion in the hands of employer; closure is generally for trade reasons. 3) In closure there is severance of employment relationship whereas in lockout there is no severance but only suspension of such relationship. 4) A lock-out is caused by the existence or apprehension of an industrial dispute whereas a closure need not be in consequence of an industrial dispute.
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17. National Tribunal [Sec. 2 (ii)]. It means a National Industrial Tribunal constituted under Sec. 7-B. 18. Public utility service [Sec. 2 (n)]. It means: i) any railway service or any transport service for the carriage of passengers or goods by air;
ia) any service in, or in connection with the working of, any major port or dock; ii) any section of an industrial establishment, on the working of which the safety of the establishment or the workmen employed therein depends; iii) any postal, telegraph, or telephone service; iv) any industry which supplies power, light or water to the public; v) any system of public conservancy or sanitation; vi) any industry specified in the First Schedule. The appropriate Government may, if satisfied that public emergency or interest so requires, by notification in the Official Gazette, declare any industry specified in the First Schedule to be a public utility service for the purposes of the Industrial Disputes Act for such period as may be specified in the notification. The period so specified shall not, in the first instance, exceed 6 months. But it may, by a like notification, be extended from time to time by any period not exceeding 6 months at any time if in the opinion of the appropriate Government, public emergency or public interest requires such extension. The First Schedule is reproduced below. The First Schedule [Sec. 2 (n) (vi)] Industries which may be declared as the public utility services under Sec.2 (n) (vi). 1. Transport (other than railways) for the carriage of passengers or goods by land or water 2. Banking 3. Cement 4. Coal 5. Cotton Textiles 6. Foodstuffs 7. Iron and Steel 8. Defense establishments 9. Service in hospitals and dispensaries 10. Fire Brigade Service 11. India Government Mints 12. India Security Press 13. Copper mining 14. Lead mining
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15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.
Zink mining Iron ore mining Service in any oilfiel Service in uranium industry Pyrities mining industry Security Paper Mill, Hoshangabad Service in Bank Note Press, Dewas Phosporite mining Magnesite mining Currency Note Press Manufacture of production of mineral oil (crude oil), motor and aviation spirit, diesel oil, kerosene oil, fuel oil, diverse hydrocarbon oils and their blends including synthetic fuels, lubricating oils and the like
26. Service in the International Airports Authority of India 19. Retrenchment [Sec. 2(oo)]. It means to end, conclude, or cease. The term as used in the Industrial Disputes Act means the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as punishment inflicted by way of disciplinary action [Ramachandra Vittuji Kothare v. Industrial Court, Nagpur, (1985) Lab. I.C. 1787 (Bom)] Retrenchment however does not include: a) Voluntary retirement of the workman; or b) Retirement of the workman on reaching the age of superannuation if the contract of employment between the employer and the workman concerned contains a stipulation in that behalf; or c) termination of the service of the workman as a result of the non-renewal of the contract of employment between the employer and the workman concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein; or d) Termination of the service of a workman on the ground of continued ill-health. Difference between the retrenchment and the closure. The important points of difference between retrenchment and closure may be enumerated as follows: 1) Retrenchment is the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as punishment inflicted by way of disciplinary action. It affects only some of the workmen. Closure, on the other hand, means closing down of the business for trade reasons and it affects all the workmen. 2) In case of retrenchment the services of workmen are terminated on account of surplus labour while in the case of closure it is on account of total closure of work by an employer.
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3) In retrenchment the trade or business remains uninterrupted as it continues; while in closure the business itself is discontinued. 4) The compensation payable to a workman on retrenchment either on account of surplus labour or closure shall be equivalent to 15 days average pay for every completed year of continuous service or any part thereof in excess of 6 months. Retrenchment as a result of bonafide closure of business does not entail any compensation beyond average pay for 3 months. Difference between lock-out and retrenchment. 1) Lock-out is temporary; retrenchment is permanent. Retrenchment results in complete severance of industrial relationship between an employer and an employee while lock-out keeps this relationship alive even during the cessation of work. The former results in severance of relationship between the employer and the employee while the latter amounts to only suspension of this relationship. 2) Lock-out is with a motive to coerce the workmen to accept the demands of the employer; retrenchment is resorted to dispense with surplus labour. 3) Lock-out is due to and during an industrial dispute; there is no such dispute in case of retrenchment. 20. Settlement [Sec. 2 (p)]. It means: 1) a settlement arrived at in the course of conciliation proceedings (which may be held by a Conciliation Officer or Board of Conciliation) and includes 2) a written agreement between the employer and workmen arrived at otherwise than in the course of conciliation proceeding where such agreement has been signed by the parties thereto in such manner as may be prescribed and a copy thereof has been sent to an officer authorized in this behalf by the appropriate Government and the Conciliation Officer. 29) Strike [Sec. 2 (q)]. It means: i) a cessation of work by body of persons employed in any industry acting in combination; or ii) a concerted refusal of any number of persons who are or have been so employed to continue to work or to accept employment; or iii) refusal under a common understanding of any number of such persons to continue to work or to accept employment. 21. Trade Union [Sec. 2 (qq)]. It means a trade union registered under the Trade Union Act, 1926. 22. Tribunal [Sec. 2 (r)]. It means an Industrial Tribunal constituted under Sec. 7-A and includes an Industrial Tribunal constituted before the 10th day of March, 1957 under this Act. 23. Unfair labour practice [Sec. 2 (ra)]. It means any of the practices specified in the Fifth Schedule (introduced by the Amendment Act of
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1982) which declares certain labour practices as unfair on the part of employers and their trade unions and on the part of workmen and their trade unions. The Amendment Act of 1982 prohibits commission of any unfair labour practice by employers and workmen [Sec. 25-T as introduced by the Amendment Act of 1982]. The person committing any unfair labour practice is punishable with imprisonment up to 6 months and fine up to Rs.1,000 or with both [Sec. 25-U as introduced by the Amendment Act of 1982]. The Fifth Schedule to the Act is reproduced below: The Fifth Schedule [See Sec. 2 (ra)] 3.5.8 Unfair Labour Practices I. On the part of employers and trade unions of employers 1. To interfere with, restrain from, or coerce, workmen in the exercise of their right to organize, form, join or assist a trade union or to engage in concerted activities for the purposes of collective bargaining or other mutual aid or protection, that is to say: a) threatening workmen with discharge or dismissal, if they join a trade union; b) threatening a lock-out or closure, if a trade union is organized; c) granting wage increase to workmen at crucial periods of trade union organization, with a view to undermining the efforts of the trade union at organization. 2. To dominate, interfere with or co tribute support, financial or otherwise, to any trade union, that is to say: a) an employer taking an active interest in organizing a trade union of his workmen; and b) an employer showing partiality or granting favour to one of several trade unions attempting to organize his workmen or to its members, where such a trade union is not a recognized trade union. 3. to establish employer-sponsored trade unions of workmen. 4. to encourage or discourage membership in any trade union by discriminating against any workman, that is to say: a) discharging or punishing a workman, because he urged other workmen to join or organize a trade union; b) discharging or dismissing a workman for taking part in any strike (not being a strike which is deemed to be an illegal strike under this Act); c) changing seniority rating of workmen because of trade union activities; d) refusing to promote workmen to higher posts on account of their trade union activities; e) giving unmerited promotions to certain workmen with a view to creating discord amongst other workmen, or to undermine the strength of their trade union;
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f)
discharging office-bearers or active members of the trade union on account of their trade union activities;
5. To discharge or dismiss workmen: a) by way of victimization; b) not in good faith, but in the colourable exercise of the employers rights; c) by falsely implicating a workman in a criminal case on false evidence or on concocted evidence; d) for patently false reasons; e) on untrue or trumped up allegations of absence without leave; f) in utter disregard of the principles of natural justice in the conduct of domestic inquiry or with undue haste;
g) for misconduct of a minor or technical character, without having any regard to the nature of the particular misconduct or the past record or service of the workman, thereby leading to a disproportionate punishment. 6. To abolish the work of a regular nature being done by workmen, and to give such work to contractors as a measure of breaking a strike. 7. To transfer a workman mala-fide from one place to another, under the guise of following management policy. 8. To insist upon individual workmen, who are on a legal strike to sign a good conduct bond, as a pre-condition to allowing them to resume work? 9. To show favoritism or partiality to one set of workers regardless of merit. 10. To employ workmen as badlis, casuals or temporaries and to continue them as such for years with the object of depriving them of the status and privileges of permanent workmen. 11. To discharge or discriminate against any workman for filing charges or testifying against an employer in any inquiry or proceeding relating to any industrial dispute. 12. To recruit workmen during a strike which is not an illegal strike? 13. Failure to implement award, settlement or agreement. 14. To indulge in acts of force of violence. 15. To refuse to bargain collectively, in good faith with the recognized trade unions. 16. Proposing or continuing a lock-out deemed to be illegal under this Act. II. On the part of workmen and trade unions of workmen 1. To advise or actively support or instigate any strike deemed to be illegal under this Act. 2. To coerce workmen in the exercise of their right to self-organisation or to join a trade union or refrain from joining any trade union, that is to say a) for a trade union or its members to picketing in such a manner that nonstriking workmen are physically debarred from entering the work places;
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b) to indulge in acts of force or violence or to hold out threats of intimidation in connection with a strike against non-striking workmen or against managerial staff. 3. For a recognized union to refuse to bargain collectively in good faith with the employer. 4. To indulge in coercive activities against certification of a bargaining representative. 5. To stage, encourage or instigate such forms of coercive actions as willful go show, squatting on work premises after working hours or gherao of any of the members of the managerial or other staff. 6. To stage demonstrations at the residences of the employers or the managerial staff members. 7. To incite or indulge in willful damage to employers property connected with the industry. 8. To indulge in acts of force or violence or to hold out threats of intimidation against any workman with a view to prevent him from attending work. The following have been held to be unfair labour practices: a) The termination of the service of a daily wage labourer on his passing matriculation examination, where the terms and conditions of appointment contained no such stipulation. This is an unfair trade practice by way pf victimization [H.D. Singh v. Reserve Bank of India, (1985) 4 S.C.C. 201]. b) Offering work on rotation basis to workmen treating them as badli workers and continuing them as such for years together (H.D. Singh v. Reserve Bank of India, supra). c) Issuance of repeated orders of appointment and termination with a view to bypass the provisions of Sec. 25-B (which defines continuous service) [Ferozpur Central Co-op. Bank v. Labour Court, (1986) 1 L.L.N. 20 (P & H)]. 24. Wages [Sec. 2 (rr)]. Wages means all remuneration capable of being expressed in terms of money, which would, if the terms of employment, express or implied, were fulfilled, be payable to a workman in respect of his employment or of work done in such employment. What is included in wages? Wages includes: i) such allowances (including dearness allowance) as the workman is for the time-being entitled to;
ii) the value of any house accommodation, or of supply of light, water, medical attendance or other amenity or of any service or of any concessional supply of foodgrains or other articles;
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iii) any travelling concession; iv) any commission payable on the promotion of sales or business or both. This clause has been added by the Amendment Act of 1982. What is not included in wages? Wages does not, however, include: a) any bonus; b) any contribution paid or payable by the employer to any pension fund or provident fund or for the benefit of the workmen under any law for the time being in force; c) any gratuity payable on the termination of his service. 25. Workman [Sec. 2 (s)]. Workman means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward. His terms of employment may be express or implied. For the purposes of any proceeding under this Act in relation to an industrial dispute, workman includes any person who has been dismissed, discharged or retrenched in connection with, or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute. Persons who are not workmen. Workman does not include any such person. i) who is subject to the Air Force Act, 1950, or the Army Act, 1950, or the Navy Act, 1957; or
ii) who is employed in the police service or as an officer or other employee of a prison; or iii) who is employed mainly in a managerial or administrative capacity; or iv) who being employed in a supervisory capacity, draws wages exceeding Rs.1,600 per mensem (the limit has been raised from Rs.500 to Rs.1,600 by the Amendment Act of 1982) or exercises, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature. 3.5.9 Reference of certain Individual Disputes to Grievance Settlement Authorities: (Chapter II-B, Sec. 9-C as introduced by the Amendment Act of 1982) The employer in relation to every industrial establishment in which 50 or more workmen are employed or have been employed on any day in the preceding 12 months shall provide for a Grievance Settlement Authority for the settlement of industrial disputes connected with an such a Grievance Settlement Authority shall be in accordance with the rules made in that behalf under the Act [Sec. 9-C (1)]. Where an industrial dispute connected with an individual workman arises in an establishment referred to above, a workman or any trade union of workmen of which such workman is a member may refer such dispute to the
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Grievance Settlement Authority for settlement [Sec. 9-C (2)]. The Grievance Settlement Authority shall follow such procedure and complete its proceedings within such period as may be prescribed [Sec. 9-C (3)]. Sec. 9-C specifically provides that no reference shall be made under Chapter III (which deals with reference of disputes to Boards of Conciliation, Courts of Inquiry or Industrial Tribunals) with respect to any dispute referred to above unless a) such dispute has been referred to the Grievance Settlement Authority concerned; and b) the decision of the Grievance Settlement Authority is not acceptable to any of the parties to the dispute [Sec. 9-C (4)]. 3.5.10 Procedure for the Settlement of Industrial Disputes and Authorities under the Act: (Chapter II, Secs. 3 to 9) The industrial disputes Act intends, by making various provisions, the prevention and settlement of industrial disputes. The Act, in its Preamble, has also emphasized this point by saying that the Act is for the investigation and settlement of industrial disputes. The Act provides elaborate and effective machinery for bringing about industrial peace by setting up various authorities for the investigation and settlement of industrial disputes. These authorities are: 1. Works Committees (Sec. 3). 2. Conciliation Officers (Sec. 4). 3. Boards of Conciliation (Sec. 5). 4. Courts of Inquiry (Sec. 6). 5. Labour Courts (Sec. 7). 6. Industrial Tribunals (Sec. 7-A). 7. National Tribunal (Sec. 7-B). The Act provides for the following modes of settlement of disputes under the Act: 1. Voluntary settlement and conciliation. 2. Adjudication and 3. Arbitration. Conciliation. The authorities that make use of conciliation as a method of settlement of industrial disputes are: 1. Works Committees. The Act encourages voluntary settlement of disputes through the Works Committees whose object is to remove causes of friction between the employers and workmen in the day-to-day working of establishments and to promote measures for securing amity and good relations between them. Industrial peace will be most enduring where it is founded on voluntary settlement.
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2. Conciliation Officers 3. Boards of Conciliation 4. Court of Inquiry: which may be constituted for inquiring into any matter appearing to be connected with or relevant to an industrial dispute? Adjudication. The aforesaid authorities endeavour to compose any industrial difference of opinion or settle the industrial dispute before it may be adjudicated upon by1. Labour Courts, 2. Industrial Tribunals 3. National Tribunal. Voluntary reference. Sec. 10-A makes provision for voluntary reference of disputes to arbitration. The various authorities which constitute the machinery for the prevention and settlement of industrial disputes are discussed below: 3.5.11 Conciliation Machinery Works Committees, Conciliation Officers, Board of Conciliation, and Courts of Inquiry constitute the conciliation machinery for settlement of industrial disputes. They can only promote settlement of industrial disputes or inquire into them but cannot make any awards which are binding on the parties. 1. Works Committees (Sec. 3) In the case of any industrial establishment in which 100 or more workmen are employed or have been employed on any day in the preceding 12 months, the appropriate Government may, by general or special order, require the employer to constitute a Works Committee. The Committee shall consist of representatives of employers and workmen engaged in the establishment. The number of representatives of workmen on the Committee shall not be less than the number of representatives of the employer. The representatives of the workmen shall be chosen in the prescribed manner from among the workmen engaged in the establishment and in consultation with their trade union, if any, registered under the Trade Unions Act, 1926 [Sec. 3 (1)]. Powers and duties. It shall be the duty of the Works Committee to: 1) promote measures for securing and preserving amity and good relations between the employers and workmen and, to that end. 2) comment upon matters of their common interest or concern, and respect of such matters [Sec. 3 (2)]. These matters are so wide-ranging as to include welfare of workers, supervision of recreational facilities and crches and hospitals, their training, wages, hours of work, bonus, gratuity, holidays with pay, and working conditions including discipline, promotions, and transfers, etc.
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2. Conciliation Officers (Sec. 4). The appropriate Government may, by notification in the Official Gazette, appoint such number of persons as it thinks fit to be Conciliation Officers. The duty of the Conciliation Officers shall be to mediate in and promote the settlement of industrial disputes [Sec. 4 (1)]. Appointment. A conciliation Officer may be appointed for a specified area or for specified industries in a specified area or for one or more specified industry. He may be appointed either permanently or for a limited period [Sec. 4 (2)]. He shall be deemed to be a public servant within the meaning of Sec. 21 of the Indian Penal Code, 1860 [Sec. 11 (6)]. Duties (Sec.12). 1) To hold conciliation proceedings. Where any industrial dispute exists or is apprehended, the Conciliation Officer may hold conciliation proceedings. Where the dispute relates to a public utility service and a notice under Sec.22 has been given, he shall hold conciliation proceedings in the prescribed manner [Sec. 12 (1)]. 2) To investigate the dispute. The conciliation Officer shall, for the purpose of bringing about a settlement of the dispute, without delay, investigate the dispute and all matters affecting the merits and the right settlement thereof. He may do all such things as he thinks fit for purpose of inducing the parties to come to a fair and amicable settlement of the dispute [Sec. 12 (2)]. But he has no authority to make a final decision. 3) To send a report and memorandum of settlement to appropriate Government. If a settlement of the dispute is arrived at in the course of the conciliation proceedings, the Conciliation Officer shall send a report thereof to the appropriate Government or an officer authorized in this behalf by the appropriate Government. He shall also send a memorandum of the settlement signed by the parties to the dispute to the appropriate Government [Sec. 12 (3)]. 4) To send full report to appropriate Government setting forth the steps taken by him in case no settlement is arrived at. If no such settlement is arrived at, the Conciliation Officer shall as soon as after the close of the investigation, send to the appropriate Government a full report setting forth the steps taken by him for ascertaining the facts and circumstances relating to the dispute and for bringing about a settlement thereof. The report shall be accompanied with a full statement of such facts and circumstances, and the reasons on account of which, in his opinion, a settlement could not be arrived at [Sec.12 (4)]. Time for the submission of the report. The report by the Conciliation Officer shall be submitted within 14 days of the commencement of the conciliation proceedings or within such shorter period as may be fixed by the appropriate Government [Sec. 12 (6)]. Further reference by the appropriate Government. If no reference is made, reasons to be communicated to the parties. If , on a consideration of the report referred to in Sec. 12 (4), the appropriate Government is satisfied that there is a case for reference to a Board of Conciliation,
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Labour Court, Industrial Tribunal or National Tribunal, it may make such reference, it shall record and communicate to the parties concerned its reasons therefore [Sec. 12 (5)]. Powers 1) Power to enter premises. A Conciliation Officer may for the purpose of inquiry into any existing or apprehended industrial dispute, after giving reasonable notice, enter the premises occupied by the establishment to which the dispute relates [Sec. 11 (2)]. 2) Power to call for and inspect documents. He may call for and inspect any document which he has ground for considering to be relevant to the industrial dispute or to be necessary for the purpose of verifying the implementation of any award or carrying out any other duty imposed on him under the Act. For these purposes, he shall have the same powers as are vested in a Civil Court under the Code of Civil Procedure, 1908 in respect of compelling the production of documents [Sec.11 (4)]. 3. Boards of Conciliation (Sec. 5) Appointment and the constitution. The appropriate Government may as occasion arises, by notification in the Official Gazette constitute, a Board of Conciliation (hereinafter called the Board) for promoting the settlement of an industrial dispute [Sec. 5 (1)]. The Board shall consist of a Chairman and 2 or 4 other members, as the appropriate Government thinks fit [Sec. 5 (2)]. The chairman shall be an independent person [For the definition of independent person, refer to Sec. 2 (i)]. The members shall be persons appointed in equal number to represent the parties to the dispute. A person appointed to represent a party shall be appointed on the recommendation of that party [Sec. 5 (3)]. But if any party fails to make a recommendation within the prescribed period, the appropriate Government shall appoint such persons as it thinks fit to represent that party [Proviso to Sec. 5 (3)]. A Board, having the prescribed quorum, may act, notwithstanding the absence of the chairman or any of its members or any vacancy in its number [Sec. 5 (4)]. But if the appropriate Government notifies the Board that the services of the chairman or any other member have ceased to be available, the Board shall not act until a new chairman or member, as the case may be, has been appointed [Proviso to Sec. 5 (4)]. Reference of dispute. Where the appropriate Government is of opinion that any industrial dispute exists or is apprehended, it may at any time, by order in writing, refer the dispute to a Board of Conciliation for promoting a settlement thereof [Sec. 10 (1) (a)]. Where the parties to an industrial dispute apply in the prescribed manner, whether jointly or separately, for a reference of the dispute to a Board, the appropriate Government, if satisfied that the persons applying represent the majority of each party, shall make the reference accordingly [Sec. 10 (2)]. Prohibition of strike or lock-out. Where an industrial dispute has been referred to a Board under Sec.10, the appropriate Government may by
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order prohibit the continuance of any strike or lock-out in connection with such dispute which may be in existence on the date of the reference [Sec. 10 (3)]. Duties (Sec. 13). 1) To bring about a settlement of the dispute. Where a dispute has been referred to a Board of Conciliation, it shall be the duty of the Board to endeavour to bring about a settlement of the same. It shall, without delay, investigate the dispute and all matters affecting the merits and the right settlement thereof. it may also do all such tings as it thinks fit for the purpose of inducing the parties to come to a fair and amicable settlement of the dispute [Sec. 13 (1)]. 2) To send a report and memorandum of settlement to the appropriate Government. If a settlement of the dispute is arrived at in the course of conciliation proceedings, the Board shall send a report thereof to the appropriate Government together with a memorandum of the settlement, signed by the parties to the dispute [Sec.13 (2)]. 3) To send a full report to the appropriate Government setting forth the steps taken by the Board in case no settlement is arrived at. If no such settlement is arrived at, the Board shall, as soon as practicable after the close of the investigation, send to the appropriate Government a full report setting forth the proceedings and steps taken by the Board for ascertaining the facts and the circumstances relating to the dispute and for bringing about a settlement thereof. The report shall be accompanied with a full statement of such facts and circumstances its findings thereon, the reasons on account of which, in its opinion a settlement could not be arrived at and its recommendations for the determination of the dispute [Sec. 13 (3)]. 4) To communicate reasons to the parties if no further reference made. If on the receipt of a report in respect of a dispute relating to a public utility service, the appropriate Government does not make a reference to a Labour Court, Industrial Tribunal or National Tribunal under Sec. 10, it shall record and communicate to the parities concerned its reasons therefore (Sec. 13 (4)]. 5) To submit report within 2 months. The board shall submit its report within 2 months of the date on which the dispute was referred to it or within such shorter period as may be fixed by the appropriate Government [Sec. 13 (5)]. The appropriate Government may, from time to time, extend the time for the submission of the report by such further periods not exceeding 21 months in the aggregate. The time for the submission of the report may also be extended by such period as may be agreed on in writing by all the parties to the dispute. Report of the Board to be in writing and to be signed and its publication. The report of the Board shall be in writing and shall be signed by all the members of the Board. A member of the Board may record any minute of dissent from a report or from any recommendation made therein [Sec. 16 (1)]. Further the report together with the minute of dissent recorded therewith shall be published by the appropriate Government within 30 days from the receipt thereof [Sec. 17 (1)].
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Powers 1) Power to enter premises. A member of a Board may for the purpose of inquiry into an existing or apprehended industrial dispute, after giving reasonable notice, enter the premises occupied by any establishment to which the dispute relates [Sec. 11 (2)]. 2) Powers of Civil Court. A Board shall have the same powers as are vested in a Civil Court under the Code of Civil Procedure, 1908, when trying a suit in respect of the following matters, namely: a) enforcing the attendance of any person and examining him on oath; b) compelling the production of documents and material objects; c) issuing commissions for the examination of witnesses; d) in respect of such other matters as may be prescribed. Every inquiry or investigation by a Board shall be deemed to be a judicial proceeding within the meaning of Secs. 193 and 228 of the Indian Penal Code, 1860 [Sec. 11 (3)]. All members of a Board shall be deemed to be public servants within the meaning of Sec. 21 of the Indian Penal Code, 1860 (Sec. 11 (6)]. Subject to any rules that may be made in this behalf, a Board shall follow such procedure as it may think fit [Sec. 11 (1)]. 4. Courts of Inquiry (Sec. 6). Appointment and constitution. The appropriate Government may, by notification in the Official Gazette, constitute a Court of Inquiry (hereinafter called the Court) for inquiring into any matter appearing to be connected with or relevant to an industrial dispute [Sec. 6 (1)]. A Court may consist of one independent person [For the definition of independent person, refer to Sec. 2 (i) or of such number of independent persons as the appropriate Government may think fit. Where a Court consists of 2 or more members, one of them shall be appointed as the chairman [Sec. 6 (2)]. A Court, having the prescribed quorum, may act notwithstanding the absence of the chairman, or any of its members or any vacancy in its number [Sec. 6 (3)]. But if the appropriate Government notifies the Court that the services of the chairman have ceased to be available, the Court shall not act until a new chairman has been appointed [Proviso to Sec. 6 (3)]. All members of the Court shall be deemed to be public servants within the meaning of Sec. 21 of the Indian Penal Code, 1860 [Sec. 11 (6)]. Reference of dispute. Where the appropriate Government is of opinion that any industrial dispute exists or is apprehended, it may at any time, by order in writing, refer any matter appearing to be connected with or relevant to the dispute to a Court for inquiry [Sec. 10 (1) (b)]. Where the parties to an industrial dispute apply in the prescribed manner, whether jointly or separately, for a reference of the dispute to a Court, the appropriate Government, if satisfied that the persons applying represent the majority of each party, shall make the reference accordingly [Sec. 10 (2)].
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Subject to any rules that may be made in this behalf, the Court shall follow such procedure as it may think fit [Sec. 11 (1)]. Duties. A Court shall inquire into the matters referred to it and report thereon to the appropriate Government ordinarily within a period of 6 months from the commencement of its inquiry (Sec. 14). The report of the Court shall be in writing and signed by all the members of the Court. Any member of the Court may record any minute of dissent from a report or from any recommendation therein [Sec. 16 (1)]. The report together with any minute of dissent recorded therewith shall be published within a period of 30 days of its receipt by the appropriate Government [Sec. 17 (1)]. The duty of a Court is to abide by the principle of fair play and justice [Hindustan Steel Ltd. v. State of Orissa, A.I.R. (1968) Ori. 345]. Powers 1) Power to enter premises. A member of a Court may for the purpose of inquiry into an existing or apprehended industrial dispute, after giving reasonable notice, enter the premises occupied by any establishment to which the dispute relates [Sec.11(2)]. 2) Powers of Civil Court. A Court shall have the same powers as are vested in a Civil Court under the Code of Civil Procedure 1908, when trying a suit in respect of the following matters, namely a) enforcing the attendance of any person and examining him or oath; b) compelling the production of documents and material objects; c) issuing commissions for the examination of witnesses; d) in respect of such other matters as may be prescribed. Every inquiry or investigation by a Court shall be deemed to be a judicial proceeding within the meaning of Secs- 193 and 228 of the Indian Penal Code, 1860 [Sec. 11 (3)]. A Court may, if it so thinks fit, appoint one or more persons having special knowledge of the matter under consideration as assessor or assessors to advise it in the proceeding before it [Sec. 11 (5)]. Objective questions : 1. It means the permanent closing down of a place of employment or part thereof. ________ a. Lock out b. closure c. retrenchment d. lay-off 2. __________ means the failure, refusal or inability of an employer to give employment to a workman a. lay off b. lockout c. compulsory waiting d. closure 3. ___________ means the temporary closing of a place of employment, or the suspension of work, or the refusal by an employer to continue to employ any number of persons employed by him. a. lockout b. layoff c. closure d. lay-off
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Short Questions : 4. What are the objectives of the Industrial Disputes Act? 5. Define Industry. 6. What is an Industrial Dispute? Extended Questions : 7. Discuss the Unfair Labour Practices in India. 8. Discuss the referral of Industrial Disputes to Grievance Settlement Authorities. 9. Explain the procedure for settlement of Industrial Disputes and authorities under the act. 10. Critically examine the Conciliation Machinery process in India. Summary The Industrial Disputes Act, 1947 was passed with a view to removing certain shortcomings found in the working of the Trade Disputes Act of 1929. It also introduces 2 new institutions for the prevention and settlement of industrial disputes, viz., Works Committees and Industrial Tribunals. It also seeks to reorient the administration of the conciliation machinery. Conciliation under the Act has also been made compulsory in all disputes in public utility services and optional in all other industrial establishments.
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UNIT-IV
INCOME TAX ACT AND SALES TAX ACT
Income Tax Act and Sales Act Governments have several options at hand to finance their activities and pursue their fiscal policy. These options include the imposition of taxes and the generation of non-tax revenues through fees, levies, cost recovery and user charges, property and investment income, domestic and foreign borrowing (including loans from multilateral institutions), seigniorage (rents generated from the governments monopoly power to print currency and coins), the sale of government assets (including the sale of public enterprises) and domestic and foreign grants. In most countries, conventionally defined legal taxes and levies constitute a significant proportion of GDP, and finance a major part of government expenditure. It is therefore essential that tax systems be designed to achieve the appropriate trade-offs among revenue generation, allocation efficiency, equity, and administration and compliance costs. Tax planning is not a device to reduce tax burden. In fact, it helps savings by investments in government securities. Savings reduce extravagance, and correspondingly inflation. Tax savings are permitted only for investment made i:n government securities and bonds of priority sectors which ultimately help the nation. Therefore, the savings in tax help the Central and state governments to mobilizes funds by way of investments and as such the government earns much by way of other benefits, by sacrificing small amount of tax. The Supreme Court in one case observed that Tax planning may be legitimate provided it is within the framework of Law.
4.1 Introduction of Corporate Tax Planning and Sales Tax Act
Liquidity-when he requires the amount to meet the educational expenses of children, for marriage, house construction or for a secure future after retirement.
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Security of the investment. The return and tax on income on such investments.
The era of liberalization that was ushed in the early 90s through the introduction of economic reforms is perhaps the most significant event in the economic history of India. In the last 15 years, we have taken giant strides in intergrating our economy with the New International Economic order. The unification of our markets with the international markets has created tremendous opportunities for Indian industry and paid rich economic dividends to the nation. Today, there seems no dispute that India will soon emerge as a major international econmic power and join the league of the worlds most developed nations. It does seem that the introduction of VAT would have positive ramifications for our economic growth and national development. The success of VAT is well recognized from the fact that more than 130 countries around the world follow this system. Until recently, it was only the United States and India amongst the more populous countries that did not follow VAT. However, this has now changed and India has reformed its tax regime. Right at the outset, however, we must note that for the successful implementation of VAT, it is important that there be constant dialogue between all the stakeholders regarding issues related to VAT and its implementation. This includes legal and tax professionals, companies, traders, consumers and the State governments. It is confident, that forums such as this would go a long a way in generating that dialogue. 4.2 Learning Objectives After studying this unit you should be able to:

Define Corporate Tax Planning. Understand the essentials of Sales Tax Act. Describe the functions of CST and TNGST . Implementing the formalities in forming a contract. Analyze the need and Importance of VAT.
4.3 Corporate Tax Planning 4.3.1The Important Highlight of Corporate Tax Planning
Tax planning is an arrangement of ones financial and economic affairs by taking complete legitimate benefit of all deductions, exemptions, and allowances and rebates so that tax liability reduces to minimum. Tax laws are fully complied within its framework. Not taking form of colorable devices.
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Having no intention to deceit the legal spirit. Planning of tax must be correct both in form and substance.
4.3.2 Computing of Profits and Gains Estimated income scheme for computing profits and gains of retail traders
The taxpayer is engaged in the business of retail trade in any goods or merchandise. Total turnover from the above business does not exceed Rs.40lakh. Income to be calculated on estimated basis @ 5%. Rate of 5% is comprehensive.
4.3.3 Deductions Deduction in respect of profits and gains from the business of collecting bio-degradable waste [Sec. 80JJA] Section 80JJA is applicable where the gross total income of the assessee includes any profits and gains derived from the business of collecting, processing or treating of biodegradable waste for generating power or producing bio-fertilizers, bio-pesticides or other biological agents or for producing bio-gas or making pellets or briquettes for fuel or organic manure Deduction in respect of employment of new workmen [Sec. 80JJAA] Income of the tax payer includes any profits or gains derived from any industrial undertaking engaged in the manufacture or production of article or thing. The amount of deduction is equal to 30% of additional wages paid to new regular workmen employed by the assessee in the previous year. Deduction in respect of certain income of offshore Banking units [Sec. 80LA] The gross total income of the assessee includes Any income from a branch in Special Economic Zone From the business referred to in section 6(1) of the Banking Regulations Act Received in convertible foreign exchange If the conditions are satisfied, then 100% of the aforesaid income is deductible for three consecutive assessment years beginning with the assessment year. 4.3.4 Tax Planning with Reference to Financial Management Decisions Tax Planning is calculated based on the Management Decisions is as follows: 1. Capital Structure Decisions
Distributed profit will subject to extra tax, While interest paid on borrowed capital is allowed as deduction under Sec 36(1)
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Cost of raising finance through borrowing is deductible in the year in which it is incurred (pre-commencement period capitalized). Cost of issue of share is allowed as deduction in five years, Sec35D.
2. Dividend Policy Meaning of dividend under Sec 2(22). Tax treatment in the hands of shareholders. Tax deduction at source under Sec 194. Tax on dividend. 3. Meaning of Dividend: Sec2 (22) Deemed Dividend-chargeable to tax, under Income from other sources. The following payments or distributions by a company to its shareholders are deemed as dividends Release of companys assets. Debenture stock, debenture, deposit certificates and bonus to preference shareholders Liquidation of company Reduction of capital. Loan or advance, but not made in the ordinary course of the business. Sec77A Not treated as dividends

Purchase of its own shares. Scheme of de-merger by the resulting company. Accumulated Profits Distribution of accumulated profits entailing release of companys assets[Sec2(22) (a)] Distribution of accumulated profits in the form of debentures, debenture stock[Sec.2(2) (b)] Distribution of accumulated profits at the time of liquidation[Sec2(22) (c)] Distribution of accumulated profits on the reduction of its capital[Sec2(22) (d)] Distribution of accumulated profits by way of advance or loans[Sec.2(22) (e)] Tax treatment in the hands of shareholders. Bonus Shares to equity shareholders Bonus Shares to preference shareholders
Other factors under dividend

4. Bonus Shares:

4.3.5 Tax Planning with Reference to Managerial Decisions 1. Purchase of asset out of own funds or out of borrowed capital The factors which determine effective tax savings are:
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Rate of depreciation Marginal tax rate
2. Lease vs. Purchase If asset is purchased, the assessee can claim depreciation. In case of obtaining on lease, deduction can be claimed in respect of lease rentals and lease management fees. 3. Purchase by installment vs. Hire If an asset is purchased by installments, then the taxpayer can claim depreciation under Sec32.In the case of obtaining an asset on hire, deduction can be claimed in respect of hire charges. 4. Sale of asset used for scientific research Any asset is sold without having been used for other purposes and sale proceeds, together with the amount of deduction under Sec 35, exceed the capital expenditure, such surplus or the amount of deduction allowed, whichever is less, is chargeable to tax. 5. Make or buy Many costing or non-costing considerations guide the decisions relating to make or buy. 6. Repairs, replace, renewals or renovation In this expenditure is deductible as revenue expenditure under Sections 30, 31, or 37(1).If it deduction is made under these sections, and then cost of financing such expenditure is reduced to the extent of tax saved. 7. Shut-down or continue Business/profession loss will be carried forward even if such business/ profession is discontinued. Tax Planning in respect of Employees Remuneration 1. Factors which require consideration 2. Deduction of remuneration in the hands of employer 3. Tax incidence in the hands of employees 4. Remuneration planning 4.4 Overview of Sales Tax The Following points are discussed as below:

What is a Sales Tax? History of CST Features of CST, 1956 Definitions Principles for determining inter-state trade Exceptions to CST
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Types of goods CST rates Penalties A tax levied at the point of sale and based on the retail price of a good or service. Different from value added tax (VAT). Sales tax in India is covered under: a) Central Sales Tax b) State Sales Tax (TNGST)
4.4.1 What is a Sales Tax?
4.4.2 Central sales tax History of Central sales tax
Levy of tax by states even when one ingredient of sale was present. (ingredient being contract, payment, delivery or passing of title) Multi levy of tax because of Nexus theory Led to amendment of Constitution in 1956 to include entry no 92 A to empower Parliament to levy tax on inter-state trade. Applicability: Whole of India on all goods Place: Where the goods were sold in the IST Registration: Dealers to register U/S 7. And are liable to pay CST when they make an inter-state trade Levy: By central govt., collection by state govt. Basis: On the amount of turnover in IST Assessment: Made by the assessing authority based on the returns submitted by the registered Dealer.
Features of CST, 1956

4.4.3 Definitions
Dealer: Any person carrying on the business of buying, selling or distributing goods directly or indirectly for cash, deferred payment, commission or any remuneration. Business: Any trade, commerce or manufacture with or without a profit motive Sale: Transfer of property from one person to another for a valuable consideration. Goods: All materials, articles, commodities except newspapers, shares, money, claims Rate: As prescribed in the Act.
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4.4.4 Principles for determining Inter-State Sales Tax The sale or purchase: Occasions the movement of goods from one state to another or Is effected by a transfer of documents to the title of goods during the movement of goods from one state to another Exceptions to CST Sale of electric energy Sale to an exporter for the purpose of export (penultimate sale) Subsequent sale: a) To registered Dealer or b) To Govt. Types of Goods Declared goods or goods of special importance: These are goods mentioned U/S 14 of CST (e.g.. Cereals, Coal, Cotton etc) Undeclared goods 4.4.5 Central Sales Tax rates
Types of goods Sale to Govt.
Sale to regd. dealer
Sale to un regd. dealer
Declared goods 4% or State sales tax rate, 4% or State sales tax rate, TWICE the general sales tax whichever is lower. Form: D whichever is lower. Form: C rate. (8%)
Undeclared goods
Same as above
Same as above.
10% or sales tax whichever is less
Penalties Penalties in the form of prosecution/ fine U/S 10 Penalties in lieu of prosecution U/S 10 Seller or buyer: Imprisonment of 6 months or fine Purchaser: Fine up to 1 times the tax Definitions 1. Sale: Sale means transfer of property in goods by one person to another in the course of business for cash, deferred payment or other valuable consideration and includes:
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Transfer of property in goods Work contract Hire purchase Right to use Supply of goods by unincorporated association Supply of food as part of any service Terms like Deemed sale, Goods, Declared goods, Dealer, Registered dealer, Turnover etc have also been defined in the act. 4.4.6 Levy of Sales Tax under TNGST Levy of surcharge: Surcharge is leviable throughout the state at the rate of 5% on taxes. Single-point tax: Section 3 of TNGST act is the main charging section. It provides levying tax at the specific rate and at point fixed under the - I schedule. It has 190 items being divided into 8 parts. Each part carries a different rate of tax meant for levy at the point of sale. Levy can be at the point of first purchase or at the last. Multi-Point Tax: Goods mentioned in the sixth schedule. Example: Alcoholic liquors, will be subject to tax rates varying between 25% and 55% at the I and II point of sale in the state. Cement (V Schedule) will be at 16% or 24% at the first sale and 1% or 5% at every subsequent sale in the state. 4.4.7 Types of levy of TNGST A. Levy based on classification of goods: This levy based on classification according to schedules as follows: I schedule: spares components and accessories (s). II schedule: Rice, Paddy, wheat, cotton etc.,(s) Maximum rate is 4%. III schedule: Goods of Special importance. IV schedule: Transfer of goods involved in works contract. V schedule: Cement (M). VI schedule: Alcoholic liquor except foreign liquor VII schedule: Goods coming from outside the state and pass through the state to obtain a transit pass like edible oils, marbles, diesel engines, air coolers etc., VIII schedule: Sale of goods for installation in the factory site in the state for manufacture of any goods. IX schedule: Levy of tax on hotels, restaurants and sweet stalls, dealers in jewellery.
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X schedule: Dealers in lottery tickets. XII schedule: Bitumen, aviation gasoline, Kerosene, diesel oil, lubricating oils, white kerosene, alcoholic liquors purchased or procured from outside and foreign liquors imported from abroad. VIII schedule: Sale of goods for installation in the factory site in the state for manufacture of any goods. IX schedule: Levy of tax on hotels, restaurants and sweet stalls, dealers in jewellery. X schedule: Dealers in lottery tickets. XII schedule: Bitumen, aviation gasoline, Kerosene, diesel oil, lubricating oils, white kerosene, alcoholic liquors purchased or procured from outside and foreign liquors imported from abroad. A. Compounded levy: It is an option given to every dealer whose total turnover is not less than 1 lakh but not more than 2 lakhs rupees. Section 7(1) applies. Conditions: Dealers other than a casual dealer and a non-resident dealer. The dealer opting should intimate the dept. within 30 days from commencement of business or before April 30. The dealer is not allowed to collect tax. Not required to maintain product-wise books of accounts. Change in the system for the next year should be intimated to sales tax authorities. 4.4.8 Payment of Tax at Compound Rates is at the following rates
Rates as per section 7(1) Slab of turnover a) When the total turnover is not less than Rs.100000 but less than 110000. b) When it is not less than 110000 but less than 120000 a) When it is not less than 120000 but less than 130000 b) When it is not less than 130000 but less than 140000 c) When it is not less than 140000 but less than 150000 d) When it is not less than 150000 but less than 160000 e) When it is not less than 160000 but less than 170000 f) When it is not less than 170000 but less than 180000 g) When it is not less than 180000 but less than 190000 h) When it is not less than 190000 but not more than 200000 Rs.4380 p.a. Rs.4680 p.a. Rs.4980 p.a. Rs.5280 p.a. Rs.3780 p.a. Rs.4080 p.a. Rs.3480 p.a. Rs.2880 p.a. Rs.3180 p.a. Rate of tax/Amount of tax Rs.2580 p.a.
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Payment of tax by work contractor The works contractor may, at his option, instead of paying tax in accordance with section 3-B on the basis of turnover pay, either on the total value of each works contract or on the total value of all works contracts executed by him in a year at the rates mentioned below: i. i. Civil works contract: 2% of the total contract value of the civil works executed. All other contracts: 4 % of the total contract value of the works executed
Tax payable by hotels, restaurants, clubs, caterers and any other eating houses When there turnover is not less than 10 lakhs of rupees for the year the tax payable is 2%. In case of Star hotels, the tax is 10% on sale turnover of food and drinks. Dealers with turnover not less than 10 lakh rupees but not more than 15 lakh may, at their option pay tax at compound rates. Dealers in jewellery may also opt for payment of tax at compound rate if not more than 15 lakh. 4. Purchase tax When taxable goods are transferred from an unregistered dealer to a registered dealer the reg. dealer has to pay tax on the goods. An unreg. Dealer cannot collect sales tax. Hence the buyer has to pay and it is purchase tax. If an unreg. Dealer collects buy mistake then reg. buyer can make adjustments of this with future tax liability. If a customer buys from a unreg. Dealer for personal consumption he is not liable to pay any tax. When an unreg. Dealer sells to other unreg. Dealer the burden shifts to the immediate reg. buyer.
4.4.9 Hierarchical order of commercial tax authorities in Tamilnadu Ministry of finance, Government of TN Commissioner of commercial taxes Joint commissioners of commercial taxes Appellate deputy commissioners of commercial taxes Deputy Commissioner of commercial taxes
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Appellate assistant commissioner of commercial taxes Territorial assistant commissioners of commercial taxes Administrative assistant commissioners of commercial taxes Assistant commissioner of commercial taxes (Assessment) Assistant commissioner of commercial taxes (check-post) Assistant commissioner of commercial taxes (Enforcement) Commercial tax officer Deputy commercial tax officer Assistant commercial tax officer 4.4.10 Procedure for registration of dealers 1. Dealers who can apply: Turnover not less than 300000 in any year Any dealer intending to start a business Casual dealer Every dealer registered under the CST act Dealer residing outside the state but carrying business inside the state Every agent of a non-resident dealer Every factor, broker, commission and delcredere agent, auctioneer or any other mercantile agent 2. Application for registration: An application in Form D should be filled It should be submitted to Registering authority A demand draft should be enclosed for the amount specified by the authority 3. Documents to be enclosed with Form D: 2 recent passport size photographs Identity to prove his existence like passport/family card/bank pass book/ driving license/VAO certificate
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Copy of MOA and AOA in case of company Copy of Partnership deep in case of partnership Form XI of TNGST act signed by applicant and manager Form A showing the estimated turnover for the year The Registering authority may demand security equal to 50% of the tax due as estimated In all cases Rs.2500/- has to be collected by way of security at the time of new registration
4.
Security money:
5.
Issue of registration certificate: The commissioner issues certificate within 7days If no notice been made with ref to the application within 20 days the dealer is deemed to be registered Registration certificate should be renewed every yr. by paying 500 before 31st march without penalty. Collection of tax by registered dealer The registered dealer may collect the tax by issuing a bill in respect of every sale, in duplicate One copy of the bill should be retained by the dealer to be checked by officials Amendment to certificate of registration Where the dealer has altered the name, place and nature of business Where the dealer has changed the class or classes of goods in which he carries on his business Where there is change in ownership in business Cancellation of registration Under section 21(4) when he proves that his turnover in each of the 2 consecutive years immediately preceding the application was less than Rs.75000 Cancellation or amendment by the prescribing authority Cancellation by the authority due to failure on the part of dealer to pay tax or penalty, declaration of false information, failure to provide security etc., Duties of a registered dealer Shall keep at the place of business certificate of registration, books of accounts. Shall notify the registering authority about the change in place of business Shall send bill of sale or delivery note or such documents along with the goods Shall furnish the returns before the due dates prescribed
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4.5 Value Added Tax (VAT) What is VAT and why is it so important? 4.5.1 General Introduction A new tax system called Value Added Tax (VAT) is scheduled to introduce throughout India from April 2003. VAT is, perhaps, one of the most important fiscal innovations of the 20th century. First introduced in France in 1954 (Taxe sur la Valeur Adjoutee), it gradually began to be adopted in other countries as well. At present, more than 160 countries, including those in Latin America, Asia, Africa and the Pacific have a VAT system in place. Introduction of VAT in India is as per decisions taken by the Empowered Committee of State Finance Ministers at the National level under the initiative of National Institute of Public Finance & Policy (NIPFP), New Delhi. Implementation of VAT in our country is a right step in this direction and to do away with multiple tax system. Under the regime of VAT, there should be no other tax such as Additional Special Tax, Entry Tax, Octroi and Central Sales Tax (CST). Government of India decided to implement VAT throughout India w.e.f 1st April 2002 but it had to be deferred till April 2003 for all the states including north-eastern states It is learnt that the Empowered Committee continued its deliberations and joint discussions with the States to finalize draft rules. The element of CST with respect to the inter state trade came in the way as the major barricade in implementing VAT due to delay in amendment of the CST Act in the Parliament. The Central Government is reluctant to phase out CST and transfer of services for taxation to the states. Moreover, there is a difference of opinion on the drafts of VAT between a few major states. At this stage, it was thought to be wise to defer implementation of VAT to April 2003 otherwise the ill-designed, complicated and half baked VAT system would have had incurred more damages to tradeandindustry. If CST is allowed to continue after the introduction of VAT, it will be an additional burden on industry with no mechanism of set-off between states. In case CST is decreased over a period of time, the difference between VAT paid on inputs and CST paid on the outputs within the same State would increase especially where ever inter-state exposure is high. So, until and unless CST is abolished and a uniform rate of tax among the states is introduced, VAT system will miserably fail and would have cascading effect on trade and industry. 4.5.2 What is VAT? VAT is a tax, which is charged on the increase in value of goods and services at each stage of production and circulation. It is also chargeable
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on the value of all imported goods. It is charged by registered VAT businesses/persons/taxpayers. VAT has replaced a number of other taxes and its introduction should not result in either increased prices to final consumers or reduced profitability of business. VAT is levied on the difference between the sale price of the goods produced or the services rendered, and the cost thereof __ that is, the difference between the output and the input. In other words It is nothing but Multi-Point Sales Tax.

It is collected on value addition only at each stage. Tax paid by the dealer is deducted from the tax payable collected at every point of sale and the tax already paid.
4.5.3 How is VAT different from the current Sales Tax?
How to calculate VAT? VAT is calculated by deducting tax credit from tax collected during the payment period.
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Illustration No.1
Example: (Rate of tax assumed is 10%) Purchase Price Tax paid during purchase Selling Price Tax collected during resale Input tax credit (Tax paid during purchase) VAT payable (outp ut tax input tax) Total tax collected by govt. At the time of purchase by the dealer At the time of resale by the dealer Total tax: Rs.(10+5) =Rs.15 Rs.100 Rs.10 (input tax) Rs.150 Rs.15 (output tax) Rs.10 Rs.5 Rs.10 Rs.5
The first thing we observe from the above table is that with equal tax rates of 10%, the final price to the consumer is 33% or Rs.174/-(Rs.702Rs.528) higher in the cascading (traditional) sales-tax system. A part of this difference is owing to the Rs.77/-(Rs.125-Rs.48) higher tax receipts of the government. The rest of the difference, Rs.97/-, is taken by higher profits of the different intermediaries B, C & D. The second thing we can observe is that almost every time the VAT is charged, it is not an expense to the person who pays it, but just an advance to the government via the supplier. This is true for all except the final customer who cannot claim the VAT deduction. Actually, he is the only one who pays the full amount. The above table assumes that the different intermediaries want to keep a fixed percentage mark-up (perhaps because of capital invested in inventory). As a result, each time there are fewer profits to the business intermediaries who dont take a mark-up on the VAT. This also explains why the VAT is considered a better tax than the sales tax. We also observe from the last two lines of the above table that the consumer is benefited by Rs.174/-(Rs.702-Rs.528) in the VAT system whereas the government loses by Rs.77/- (Rs.125-Rs.48). Note: In the above illustration, it is observed that in the VAT regime the effect on price to B is only Rs.100/-. This is because the tax paid on purchase by B is allowed to be setoff/credited against the tax (output tax) payable by C on sale of the goods. Similarly, intermediaries C and D too will be allowed input tax credit until the goods reaches the final consumer (who cannot claim the VAT deduction).
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4.5.5WhyVAT?
More equitable tax burden is shared by all dealers. More transparent easy procedures and only two rates, broadly speaking. Simpler- easy computation and easy compliance. Credit for input taxation - cost efficiency. Better Compliance - through self-policing. Prevents cascading effect through input rebate. Avoids distortions in trade and economy uniform tax rates.
Registration of -VAT Who has to register as a Taxpayer? All legal and natural persons who provide goods, works or services and have an annual sales turnover exceeding the threshold limit should register as taxpayer. All importers are required to register irrespective of their annual turnover. If the dealer supplies only exempt goods and services he must still notify the local VAT office if his turnover exceeds the threshold limit. Totally exempt businesses will not however be registered as taxpayers but still be subjected to later visits by VAT officials to confirm their exempt status. It is the person, not the enterprise, who is registered for VAT. The person is only registered once for all enterprises/branches/divisions carried on unless permission is granted to register them separately. The person to be registered :
Sole proprietor (individual) Incorporated/unincorporated body of persons Corporation / company Association not for gain Welfare organization / trust Local authority and certain public authorities
When must I register for VAT? You must register for VAT when the taxable supplies of your business exceed the threshold limit. In most cases, taxable supplies refer to your total sales. The limit changes each year, depending on inflation and
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government decisions. At present, you should register your business for VAT in the following instances:

If your taxable turnover in the previous year exceeded the threshold limit. If your taxable turnover in the next 30 days is expected to exceed threshold limit.
How do I register? You will need to complete the registration application form, which will be supplied by the VAT office, and take it or post it to your local VAT office. Your local VAT office will deal with your application and send you a certificate of VAT registration. What are my obligations as a VAT registered taxpayer?

Display your certificate of registration. Charge VAT on all taxable transactions from the date of registration Issue tax invoices. Keep accurate and up to date books and records and make it available for inspection by VAT auditors. Submit a declaration to the local VAT office each month. Pay the tax due each month.
Can I be registered even if my turnover is below the threshold limit (Voluntary registration)? Yes. But if you register you must stay registered for a period (say 2 years), which will be determined by the VAT office irrespective of your annual turnover. You will have to charge VAT on all your taxable sales and keep all the records, which all taxpayers must keep. You will be allowed to reclaim input VAT on your purchases and expenses. You will need to think carefully about the advantages and disadvantages of being registered. You may apply for voluntary registration even though the value of taxable supplies in the course or furtherance of your enterprise is below the limit of threshold per annum. It may be in your interest to register if you make supplies of goods or services mainly to other vendors. Before applying for voluntary registration you should, however, consider the obligations/ implications of registration. You may, however, a) claim a credit for input tax b) issue tax invoices to customers who are vendors. Registration is not available to persons who make only exempt supplies. Can I be registered before I make taxable supplies? If you intend to carry on an enterprise, you may, prior to the date on which your activities will commence, apply to the VAT office for registration.
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Why do I need a registration certificate? This confirms to customers that you are authorized to charge VAT. The registration certificate or a certified copy must be prominently displayed at all premises where your business operates. A registered taxpayer who has a valid Certificate of VAT Registration can only lawfully charge VAT. Declarations and Payment of VAT How do I declare and pay Tax? You must complete a VAT declaration form monthly as per directions of the VAT office for instance on the 16th day of each month. On the form you will show the amount of VAT you have paid to your suppliers and the amount you have charged your customers. The difference between the two figures is either the amount of tax due to be paid to the VAT office or the amount of credit to be carried forward to the next months declaration. Credit for purchases can only be claimed if you are in possession of an official tax invoice which shows the amount of VAT you have paid on the transaction. If you calculate that you owe tax to the VAT office it should be paid at the same time as you submit your declaration form. If you are owed tax it will be carried forward and you will deduct it from the tax you owe the following month. You will also need to show other information on your declaration. How do I obtain my monthly declaration forms? You can obtain supplies of the monthly declaration form from your local VAT office. When the VAT office issues your certificate of registration they will give you an initial supply of the forms. However, it is your responsibility to ensure that you have a declaration form and submit it to the VAT office monthly before the date mentioned by the VAT office. Who pays VAT? All dealers with an annual turnover of more than the threshold limit shall register for VAT. All dealers registered under VAT should pay. Dealers with turnover less than the threshold limit may register voluntarily. How to pay VAT? VAT will be paid along with monthly returns. Credit will be given within the same month for entire VAT paid within the state on purchase of inputs and goods. Credit thus accumulated over any month will be utilized to deduct from the tax collected by the dealer during that month. If the tax credit exceeds the tax collected during a month on sale within the state, the excess credit will be carried forward to the next month. What must I charge VAT on? VAT is chargeable at the rate fixed by the government (say 10%) of the total tax exclusive selling price on all goods and services supplied in India by registered taxpayers unless the goods or services are listed as exempt. If you are an exporter your sale abroad will be zero rated provided you have exported the goods under customs supervision and have the customs
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evidence of export. If you are in any doubt about the liability to the tax of certain goods or services you should contact your local VAT office for an official ruling. What types of input tax are eligible for VAT credit? Input tax credit is given for entire VAT paid within the State on purchases of taxable goods meant for resale/manufacture of taxable goods. Input credit generally excludes purchases: from unregistered dealers, from other states/countries, of goods used in manufacture of exempted goods, goods used as fuel in power generation, of goods to be dispatched as branch transfers outside the State, of goods used in manufacture of goods to be dispatched outside the State as branch transfer/consignments and in cases where the dealer does not have invoices showing amounts of tax charged separately by the selling dealer. The above list is not exhaustive and is considered for illustration only. The government will decide further information regarding the Input Tax Credit. Tax Rates, Taxable Supplies and Exemptions Different rates of VAT There are two rates of VAT: Standard rate (for example 10 %) Zero-rate ( 0 % ) What are Zero-rated supplies? Zero-rated supplies are supplies of goods or services on which VAT is charged at 0%. Examples include: Most of the food stuff (but not meals in restaurants or cafes and hot take-away food and drinks),

books and newspapers, exported goods most prescriptions dispensed to a patient by a registered pharmacist and most public transport services.
This list is not exhaustive and is considered for illustration only. The Government will decide further information regarding zero-rated supplies. If all or most of the supplies are zero-rated, the dealer may not need to be registered for VAT. This is called exemption from registration. What are taxable supplies? Taxable supplies are supplies of goods or services made by a vendor in the course or furtherance of an enterprise which are chargeable with VAT including any supply charged with VAT
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at the zero-rate. The following transactions by vendors are examples of taxable supplies of goods or services:
Sales of new and used goods. Leasing and rental of movable and immovable property. Private use of trading stock, assets and services. Services provided, including professional services. Services provided by local authorities and certain public authorities.
What goods and services are exempted? The list of exempt goods and services will be provided by the VAT office/ Department of Taxes, Govt. of Manipur. VAT is not chargeable on exempt sales. If all the sales are exempt the dealer will not be registered as a taxpayer but he must still notify the VAT office on a registration application form. The VAT office will confirm that the dealer does not need to be registered, and from time to time they will contact the dealer to check whether he still sales only exempt goods. When am I exempt from registering for VAT? You are exempt from the normal registration requirements for VAT if you make only zero-rated supplies. You must normally register for VAT when the value of your taxable supplies - generally speaking, the goods or services you sell - which include zero-rated goods, exceeds the threshold limit. You can also get exemption from registration when you make taxable supplies in addition to zero-rated supplies, but the level of the taxable supplies must fall below the threshold limit. In both cases, not registering for VAT means that you cannot reclaim the VAT that you pay on your purchases. Certain goods and services are classed as exempt from VAT; if you supply only these, you do not have to register for VAT. Business Obligations What if my circumstances change? You should notify your local VAT office of any changes in your business, which affect your registration or the information held by the VAT office. If you cease business and do not intend starting up another registerable enterprise you should complete an application to deregister. Tax will be due on your sales up to the date of your deregistration which will be notified by the VAT office. VAT will be payable on the disposal of any taxable assets of the business. Any unused stamped tax invoices must be surrendered to the VAT office. What if I am unsure about the procedures? Every VAT office has a Taxpayer Services section. The staff in this section has been trained to deal with any inquiries from taxpayers and they will be able to give answers to the questions. If you are in any doubt about the tax or the procedures and requirements you should contact your local VAT office immediately.
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Must I issue Special Invoices? All sales to other VAT registered tax payers must be invoiced on approved VAT invoices. Your customer will need this invoice to be able to claim his credit on the VAT he pay you. Supplies of the invoices you intend to use when you sell to other registered taxpayers must be approved and stamped by your local VAT office before issue. Exempt goods and services must not be invoiced on approved tax invoices. Invoices issued to nonregistered customers must also contain information showing the sellers name, tax number and amount of VAT charged. These invoices do not have to be stamped by the VAT office but must be approved prior to use. What are the procedures for importing goods? VAT is charged on all imports unless they are listed as VAT exempt. The tax is payable to Customs before the goods are released. VAT is calculated on the import value of the goods plus any duties or other taxes payable at import. The Customs Declaration Form will include details of the tax charged. Tax credits on imports can only be claimed if you have a customs certified copy of the import declaration form or evidence from Customs that you have paid the VAT. Keeping Records & Accounts What records must I keep? VAT is a self-assessed tax. Registered businesses must keep at least the following records and supporting documents
A Purchase Book in which all purchases and expenses of the business are separately recorded together with a note of the VAT paid to suppliers. A Monthly Sales Book recording separately all invoiced sales and the VAT charged to customers. A book recording your daily gross sales if you are a retailer, a copy of all purchase and sales invoices and a record of all imports and exports.
Will the VAT office check my records? Yes, from time to time VAT Auditors will check your books and records. Trained officers from the VAT office will come to your business premises to check your VAT records. They will normally arrange a visit by telephoning or writing to you beforehand, but sometimes they will arrive without prior arrangement. On their visits the auditors will also answer any questions you have and will give you advice if you need it. What happens if I dont comply with the requirements? VAT is a self assessed tax and it is your responsibility to make sure that you understand the requirements, pay the correct amount of taxes and keep accurate books and records. Every VAT office has a taxpayer services section to give you advice and answer your questions. There are severe penalties for not meeting all your obligations.
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What happens if I make regular Tax credit claims? If you are a frequent exporter and exports make a large part of your business it is likely that you will regularly be in tax credit. Special arrangements have been made for exporters to receive a refund rather than a credit of tax from the VAT office. In a few countries where VAT is already implemented, all claims for zero rating of exports are supported by evidence of export certified by Customs at the point of export. The original export certificates are attached to the VAT monthly declaration. Photocopies of export certificates are not accepted as evidence of export. The original certificates are returned after checking by the VAT office. Field Audit Guide Introduction One of the most important obligations of the VAT office is to provide information and education to taxpayers so that they, in turn, can discharge their VAT responsibilities. The VAT office will try to inform and educate the taxpayers in a number of ways through publicity in the press, on TV and radio, through public meetings, by issuing a taxpayer guide, by having a taxpayer services section in every office, by visiting every registered taxpayer at least once in the first year of the tax, This guide gives audit staff advice and instruction on the conduct of education/audit visits in this first year. The purpose of education/audit visits The purpose of visits by field auditors in the first year of the tax will be to ensure that each taxpayer understands his VAT obligations, has set up the necessary systems and records to account for the tax, has maintained up to date systems and records, has made the necessary monthly declarations, is accounting correctly for the tax. The visits can therefore be considered as mainly education rather than audit inspection. Planning the visit program The head of each Field Audit section will need to plan a visiting program, which will achieve the objective of visiting every taxpayer within the first year. In offices with a small taxpayer population they should aim to complete the first cycle of educational visits as soon as possible. In offices with taxpayer populations the head of the section will need to consider a number of factors when planning the visit program i.e. it would be normal to visit the larger taxpayers first on the basis that they pose the biggest
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potential risk to the system, but equally attention must be paid to those taxpayers who perhaps have poor compliance records for other taxes, or are in trade sectors where there are particular VAT technical difficulties. Each week or month, the head of the Field Audit section should allocate a number of visits to each auditor. A simple record should be kept in the Audit Selection Register (Appendix A) of the allocation and the completion of the visits. As a commitment is being given to visiting every taxpayer in the first year. it will be necessary for reports on progress to be sent monthly to the VAT office, so that he can be satisfied that this commitment will be fulfilled. On the 15th day of each month the head of the Field Audit section should complete the Audit Program Report (Appendix B) and send it to the VAT office. Education visits The education/audit visits should not normally take more than a day to complete, including writing the visit report. Occasionally a visit to a larger taxpayer who has complicated systems or where there are other complications may take longer than a day, but on the first visit this should be the exception. Preparing for the visit The audit officer should plan a weekly program of visits. To prepare properly for the visit the officer should telephone the taxpayer and arrange the date and time of the visit, ensure that the owner, a director, a partner, or a responsible person will be available on the visit, explain the purpose of the visit to the taxpayer, ask if there are any particular problems that the taxpayer will wish to discuss (you can then make sure you are well prepared with the answers), tell the taxpayer that you will want to examine this VAT books and records, examine the papers in the taxpayers file. Visiting the taxpayer Audit officers should take the taxpayer file, a copy of the law, Taxpayer guide, Retailer Guide and a notebook on the visit. The officer should examine the Taxpayer file before he goes on the visit, decide which declaration you propose auditing in depth, at the start of the visit interview the owner, partner, director or responsible person with whom the appointment was arranged, confirm that the details shown on the registration application are correct. If there have been changed which affect the registration (e.g. address has changed, directors have changed etc.) make a note of the new details, check that the certificate of VAT registration is on display for the public to see,
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ask the taxpayer if he has read his copy of the Taxpayer Guide (if he says he has lost it another copy should be given to him), ask the taxpayer to explain how his accounting system work and what books and records he keeps (make a note of what he tells), ask to see the books and records, compare the totals for each month in the sales and purchase records with the amounts declared on the various declaration in the taxpayers file. If there are differences between the books and any of the VAT returns the taxpayer must be asked to explain why there is a difference and further investigation is required in this regard. If the totals in the books agree with the totals on the VAT declarations, the audit officer should select one declaration from the taxpayers file for a more detailed audit examination. If the taxpayer is a retailer the officer should check his calculations of tax due. If the Taxpayer has exempt sales as well as taxable the officer should check his calculations of input tax claimed. If the Taxpayer is a retailer of exempt and taxable goods the officer should check that he is correctly assessing his taxable sales. Check that exempt sales are correctly classified as exempt under the law. Ask the taxpayer if he has any questions about VAT and his obligations. Ask the Taxpayer if he has made any significant capital purchases since VAT started. If it is practical to do so the officer should physically inspect any capital purchases. Inspect the business premises including warehouses (except where there are branches or premises at a distance). Complete an Audit Visit Report (Appendix C) as soon as the officer return to the office. Pass the Taxpayer file together with the officers visit report to the head of the Audit Section. Advise Registration Section of any amendments to the registration details.
Audit examination VAT control does not depend on Audit officers carrying out a full audit of all the declarations submitted to a Taxpayer. The audit should be in two parts First,asimplecomparisonofthetotalsofVAToneachmonthspurchases and sales books with the VAT declared on each monthly declaration. Secondly, a more detailed audit inspection of a selected months declaration.
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The selection of a particular declaration period for an in-depth audit will depend on a number of factors. Ideally there should be a reason for auditing a particular period rather than merely selecting one at random. Your inspection of the declarations in the Taxpayer file before you started the visit should have helped you to decide which period you intend auditing. (Perhaps there were larger than normal purchases one month, or an apparent drop in sales). When you audit the declaration should: Confirm with the taxpayer that he has given you all the records for the particular period. Check the purchase invoices against the purchase record ensuring that there is a proper VAT invoice to support all items on which VAT is being reclaimed. Check that the total of the VAT claimed in the purchase book has been correctly added up. Check that the total of the VAT claimed agrees with the total shown in the purchase book. If it is practical to do so, you should inspect all capital items on which VAT has been reclaimed and satisfy yourself that they are being used for business purposes and not personal use. If you have suspicions about capital purchases which are alleged to be kept in remote premises, perhaps in another State, you should consider asking the local VAT staff to make a visit to inspect the items. Inspect the taxpayers stock (to satisfy yourself that the level of stock is consistent with the purchasing pattern shown in the books). Check that all sales invoices are recorded in the sales book. Check that the total of VAT shown in the VAT sales book has been correctly added up. Check that the total VAT shown in the sales book agrees with the total VAT declared in the monthly declaration form. Issue an assessment if tax has been incorrectly declared. Extend you audit to other months if you consider that they are also likely to be under-declared. If the tax under-declared exceeds the threshold limit no assessment should be issued until your report has been considered by the head of the Audit Section (who may consider offence action is appropriate).

Remind him that there are penalties for under-declaring the tax. Remind him that all books and records must be kept even if they have been audited by VAT field auditors.
Audit visit reports The audit visit report is an important record in the control of VAT taxpayers because we only audit infrequently and individual officers do not normally audit the same taxpayer twice. The audit visit report gives future auditors
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useful information about what has been done on earlier visits and what systems and records the taxpayer keeps. All of the factors referred above should be covered in your visit and reported on in the Audit Visit Report (Appendix C). Additionally any other matters which may be important now or to a future auditor should be mentioned in the report, because the selection of future audit visits will be decided not just on the basis of the declaration but also any other information which is available. Have You Understood ? Objective questions : 1. What is the expansion of CST? a. commercial sales tax b. common sales tax c. compensation sales tax d. central sales tax 2. Expand TNGST._______________ a. Tamil Nadu Government Sales Tax b. Total number of goods sales tax Short questions : 3. Define corporate tax planning. 4. Write short note on: Value Added Tax Extended questions : 5. Discuss the procedures to be followed in corporate planning. 6. Explain the deductions in corporate planning. 7. Critically examine the Sales Tax Act. 8. Discuss about the TNGST and CST. 9. Evaluate the functions of VAT. Summary In many countries, in addition to legally imposed taxes there are also arbitrary and irregular tax-like levies imposed by the authorities. These levies are a part of a larger phenomenon involving the need to make extra payments when interacting with government officials in many countries, particularly at the local level and at the lower levels of bureaucracy. These levies also form a part of the burden of taxation and have socio-economic consequences. Nevertheless, these irregular payments are not captured in the traditional economic databases, including that involving government finance. When such irregular levies arise in-lieu of legally imposed taxes, the tax revenue collection will fall below what can be collected on objective grounds. When they arise in addition to the legally imposed taxes, the tax burden increases in an arbitrary and capricious manner, with detrimental effects on equity and efficiency in resource allocation. The VAT design will significantly bring in simplicity and transparency in the tax structure, thereby improving tax-compliance and eventually
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boosting the revenue growth of state governments. The hallmark of the VAT system is that VAT liability will be self-assessed by the dealers themselves in terms of submission of returns upon setting off the tax credit. The existing system of compulsory assessment at the end of each year will be discontinued. Compulsory assessments will now be limited to a few cases where a specific notice is issued. This would make tax administration simpler and reduce the costs involved in revenue collection. This system of self-assessment will be supplemented by audited mechanism where the assessments of a certain number of traders, selected on a scientific basis, will be assessed every year. This will ensure accountability and transparency in the system while avoiding undue harassment of traders and dealers. Due to the inherent transparency and accountability in the system, VAT leads to not only better tax administration but also higher levels of compliance and lesser evasion. Tax evasion is a grave problem in a developing country like ours as it leads to a creation of a resource crunch for developmental activities of the state. Reputed international institutions like the World Bank and IMF point out that the VAT regime prevents tax evasion and boosts revenues to help cash starved governments to come out of their debt-trap.
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UNIT - V
CONSUMER PROTECTION ACT AND INTRODUCTION OF CYBER LAWS
5. 5.1
Consumer Protection Act and Introduction of Cyber Laws Consumer Protection Act
5.1.1 Introduction about Consumerism Consumerism is the basis as to the protection of consumers. The following questions are important to be discussed. i) How Consumers can be protected? ii) Consumers are protected against what? Answer to the above questions may be aptly termed with Consumerism. Thus, who is a Consumer? When and by whom a complaint can be made? And what is the relief available to consumers? are the aspects of Consumerism It can be compared with a coin having two sides, viz., trader and consumer (customer). The words trader and customer have its relevance since the date of civilizations. So protection of interest of customers has been a matter of concern from older times and what we find today is not a product of a day or a year but has been a matter of constant process. 5.1.2 Learning Objectives After studying this unit you should be able to: Understand about the objectives of the Consumer Protection Act. Know about the scope of the Consumer Protection Act. Describe the essential elements of the Consumer Protection Act. Analyse the scheme of the Consumer Protection Act. Understand the functions of Consumers Protection Councils. Specify the role of Consumers Protection Courts.
Forecast the emerging scenario of Consumerism.

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In 19th century manufacturers liability was first time established in the leading case of Carlil v. Carbolic Smoke Ball Company. Further, the judgment in Donoghue v. Stervension gave impetus to it, where Lord Atkin laid down a very important principle of determining duty of a manufacturer. The facts briefly were that the defendant, a manufacturer of ginger-beer. The retailer sold it to A, who had given it to his friend Miss Donoghue. She drank the ginger-beer. The battle contained the decomposed remains of a snail which were not, and could not be, detected until the greater part of content of the battle had been consumed. As a result, she alleged that she became seriously ill in consequence and sued the manufacturer for negligence. Lord Atkin, in this case laid down the principle of duty to take reasonable care to the consumer where products result in an injury to the consumers life or property. This case was followed by the Judicial Committee of the Privy Council in 1935 in Grant v. Australian Knitting Mills Ltd. But, Consumer Movement in England starts after the First World War when Labour Party for the first gave slogan of Battle for the Consumers. By lapse of time this movement became stronger and under pressure, British Government established Molony Committee. On the recommendation of this committee Consumer Council was constituted and thereafter various legislations were enacted in England. The United Nations has passed a resolution in April 1985 indicating certain guidelines under which the Government could make law for better protection of the interest of the consumers. Such laws were more necessary in the developing countries to protect the consumers from hazards to their health and safety and to make them available speedier and cheaper redreSecs. This was a great step in the movement of consumerism. The framework for the Consumer Act was provided by a Resolution, dt. 9.4.1985 of the General Assembly of the United Nations Organisations. This is known as Consumer Protection Resolution No.39/248. India is a signatory to the said resolution. In India, it was at the end of twentieth century the Consumer protection was enacted. The Consumer Protection Act, 1986 received the assent of the President on Dec. 24, 1986, but came into force on 15th April, 1987. Prior to this Act, we have the Indian Contract Act, 1827, The Sale of Goods Act, 1927, The Dangerous Drugs Act, 1940. The Agricultural Produce (Certification Marks) Act, The Prevention of Food Adulteration Act, 1954. The Indian Penal Code 1860, The Standards of Weights and Measures Act, etc. 1979 which to some extent protect consumer interests. However, these laws require the consumer to initiate action byway of a civil suit involving lengthy legal process which is very expensive and time consuming. The Consumer Protection Act was enacted to provide a simple and quicker access to redressal of consumer grievances. The object of the Act is given in the preamble of the Act. It says: An Act to provide for better protection of the interests of consumers
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and for that purpose to make provision for the establishment of consumer councils and other authorities for the settlement of consumer disputes and for matters connected therewith. 5.1.3 The Consumer Protection Act 1986 The Consumer Protection Bill, 1986 sets out objects and reasons which have been mentioned under S 6 of the Act. They are: 1. The right to be protected against marketing of goods which are hazardous to life and property. 2. The right to be informed about the quality, quantity, potency, purity, standards and price of goods to protect the consumer against unfair trade practices; 3. The right to be assured, wherever possible, access to variety of goods at competitive prices, 4. The right to be heard and to be assured that consumers interest will receive due consideration at appropriate forums, 5. The right to seek redressal against unfair trade practice or unsulptuous exploitation of consumers and 6. The right to consumer education. Virtually, this is the Consumers Charter which has been provided under S.6 of the Act. The following rights have been added by the Amendment Act, 1993 and 2002 respectively. 7. The right to be protected from unfair trade practices as defined under section 36A of M.R.T.P.Act, 1969 and 8. Protection from spurious goods or offering such goods for sale or adopting deceptive practice in the provision of services. The above mentioned, rights may be explained as follows: Right to Safety It is right to be protected against the marketing of goods and services which are hazardous to life and property. Traders must ensure that goods are safe for users, in case of hazardous goods; they give clear instructions as to mode of use, the risk involved in improper use of goods, vital safety information is conveyed to consumers. Where product is found such as is likely to be hazardous traders should either recall it and modify the same, or replace it with a new product, or adequately compensate for it. Right to information It is right to be informed about the quality, quantity, potency, purity, standards of price of goods or services, with a view to protect the consumer. Consumer should be instructed in the proper use of goods and should be informed of the risks involved in the intended or normally
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foreseeable use. Vital safety norms should be conveyed to consumers against unfair trade practices. This is very significant right of consumers, since adequate information is very important in order to make a right choice of the goods and services. This ensures consumers of having maximum information about the wide variety of competing goods available in the market. Now, the Supreme Court has designated this legal right as a fundamental right of the consumer within the purview of Articles 19(1)(a), 21 & 25 of the Constitution. Right to choose It is a right to be assured, wherever possible, access to variety of goods at competitive prices. It can be made me made meaningful by ensuring access to a variety of goods and services at competitive prices. Fair and effective competition in the market must be encouraged so as to provide consumers with the widest range of products and the services at the reasonable price. Right to Represent It is a right to be heard and to be assured that consumers interest will receive due consideration at appropriate forums. Under the provisions of the Act every consumer has a right to file complaint and be heard in that context. Right to Redressal It is a right to seek redressal against unfair trade practices or restrictive trade practices or unscrupulous exploitation of consumers. This right has been ensured by establishing three-tier system of consumer FORA and by providing procedure of getting redress as well as recognizing restrictive and unfair trade practices as a ground to make a complaint. Right to Education The right to consumer education is a right which ensures that consumers are informed about the practices prevalent in the market and the remedies available to them. Booklets informing citizens about their rights to services will be made available. The Government should also plan to set-up monitoring agencies for this purpose. The role of media and NGOs maybe significant in this direction. Wider publicity of consumer rights and the rights available in the Act is needed to make this right effective throughout the country. Protection from Unfair Trade Practices This has been provided by the Amendment Act, 1993 which ensures protection to consumers against unfair trade practices of traders. Protection against Spurious Goods This right has been added by the Amendment Act, 2002. Goods which are spurious or hazardous shall be prevented from marketing. This is essential which protects the public health and life. The rationale behind this provision is to ensure physical safety of the consumers.
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In the post period of the Act some leading cases like Lucknow Development Authority v. M.K.Gandhi (A.I.R. 1994 S.C.787), All India Medical Association v. V.P.Santha (A.I.R.1996 SC 500), J.J.Merchant v. Sri Nath Chaturvedi (A.I.R. 2002 S.C.184) have strengthened consumerism very significantly. In the span of 16 years there has been drastic amended in the Act, viz., in 1993 and 2002. With the amendment of the Consumer Protection Act, 1986 in 2002, the law of Consumer Protection in India has been totally changed. The experience of working of the enactment has brought out many shortcomings and the needs of judicial delivery system through Redressal Agencies with the passage of time having changed, had been the causes of such overhauling of the system as a whole. The new provisions have been made in furtherance of protection of the interest of consumers. The new changes have finally amended the consumer courts with teeth to protect their rights. Authors view is that the Consumer Protection Act when passed in the year 1986 was a child. After Amendment in 1993 it became young and after Amendment in the year 2002, it has attained its maturity but still move needs to be done. Voices are raised for imposition of fees for filing complaints in consumer courts because it is against the spirit of the Act to provide a cheap and simple relief to consumers. There should be specific provisions for service providers. Financial services which cover shares and stocks including debentures should also be brought up within the purview of the Act. Adequate infrastructure also provided for the smooth functioning of these courts. Right to information: A Fundamental Right of consumers Right to know whether food products, cosmetics and drugs are of nonvegetarian or vegetarian origin; is fundamental Right of Consumers. Consumerism is the basic thought that consumer needs to be protected. The fundamental questions which spring from this basic thought are i) How consumers can be protected? ii) Consumers are protected against what? The Consumer Protection Act is an apt answer of the above two questions. The Act provides a machinery for redressal agencies known to Consumer FORA and certain rights of consumers viz., right to safety, right to information, right to choose, right to represent, right to redressal and right to education. These are the legal rights of Consumer and Consumer Forum is meant to protect them. Right to information is a right to be informed about the quality, quantity, potency, purity, standard and price of goods and services, with a view to protect the consumer against unfair trade practices. Right to information though a legal right has now assumed as a fundamental right of consumers. This question came for discussion before the Apex Court in Ozir Husain v. Union of India (A.I.R.2003 S.C. 103). In this case the petitioner
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claims to be animal welfare volunteer and a member of several animal welfare organizations. He is also stated to be a conscientious objector of consumption and use of animals and their derivatives for food, cosmetics and drugs. It has been highlighted in the petition that more than 60% of the people of this country are vegetarian and over 50% of them are illiterate and large number of them cannot read or write English. It is also urged that there should be complete disclosure of constituents of cosmetics and food products and that such food products should bear an easily recognizable symbol conveying the origin or ingredients of the products, whether vegetarian or non-vegetarian, so that literate or illiterate consumers can make an info rmed cho ice befo re select ing t he products. By this public interest writ petition the petitioner sought: i) a direction to the respondents to protect the rights of innocent conscientious consumers who object to the use of animals in whole or impart or their derivatives in food, cosmetics and drugs, etc. by making the manufacturers and packets thereof to disclose the ingredients of the aforesaid products so that they may make an informed choice with regard to their consumption;
ii) a direction to the manufacturers and packers of cosmetics, drugs and articles of food for complete and full disclosure of the ingredients of their products being sold to consumers; iii) a declaration that the consumers have right of making an informed choice between the products made or derived from animal and non-animal ingredients; and iv) a direction to manufacturers and packers of food, cosmetics and drugs that the products made from animals should bear an easily identifiable symbol conveying that it has an animal ingredient. The petitioner pleads to the Constitution mandates disclosure of information. The Supreme Court discussed the above provisions of Art. 19(1)(a), 21 and 25 of the constitution separately in detail. 5.1.4 Commentary on the Consumer Protection Act, 1986 Definitions (S.2) Section 2 of the Act defines certain words used in the various sections. These definitions are relevant in order to have clear connotation of the provisions of the Act. In absence of such definition the context of the provisions maybe interpreted differently. Definitions - (1) In this Act, unless the context otherwise requires a) Appropriate laboratory means a laboratory or organisation i) recognised by the Central Government ii) recognised by a State Government , subject to such guidelines as may be prescribed by the Central Government in this behalf; or iii) any such laboratory or organisation established by or under any law for
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the time being in force, which is maintained, financed or aided by the Central Government or a State Government for carrying out analysis or test of any goods with a view to determining whether such goods suffer from any defect. This definition is more wider than the repealed definition of the original Act which says appropriate laboratory means a laboratory or organisation recognised by the Central Government and established by or under any law for the time being in force, which is maintained, financed or aided by the Central Government or a State Government for carrying out analysis or test of any goods with a view to determining whether such goods suffer from any defect. Followings are Appropriate Laboratory for the purpose of the Act a laboratory or organisation, should be I. II. III. a) b) recognised by the Central Government recognised by a State Government or any such laboratory or organisation established by or under any law for the time being in force; which is maintained, financed or aided by the Central Government or a State Government ; and c) for carrying out analysis or test of any goods with a view to determining whether such goods suffer from any defect. Object of the Appropriate laboratory The purpose of the Act is to protect the consumers from defective goods. The function of appropriate laboratory is to test or analyse the substandard, defective or adulterated goods and to give expert opinion as to purity or standard of the goods under question. This helps the consumer courts in their functioning as per scheme of the Act. Section 2(1)(b) Defines Complainant Complainant meansi) a consumer; or ii) any voluntary consumer association registered under the Companies Act, 1956 (1 of 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; iv) one or more consumers, where there are numerous consumers having the same interest; (v) in case of death of a consumer, his legal or representative], who or which makes a complaint. For the scheme of the Act the words, complainant and complaint are significant. It is the complainant who makes complaint for the remedy provided in the Act. Who is a complainant? It is the complainant who makes complaint in consumer courts for remedy as to defects in goods or deficiency in services. The Art includes the
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following groups of persons as complainant; 1. a consumer or 2. any voluntary co nsumer association registered under the Companies Act, 1956 or under any other law for the time being in force; or To be complainant voluntary consumer association must be registered under: i) The Companies Act, 1956 or ii) Any other law such as Societies Registration Act, 1860 or iii) Registered organizations under Law of Trust, 3. the Central Government or 4. any State Government or 5. one or more consumers, where there are numerous consumers having the same interest or 6. legal heir or representative of deceased consumer. As to general principle of law that only an aggrieved person has locus standi to make complaint does not apply. Here the consumers are the real aggrieved per so ns fo r t he pu rpo ses o f t he Act , but besides him other persons may also file complaint. This provision makes remedy under the Act simple and popular. Prospective Investor It has been decided in Margan Stanley Mutual Fund v. Kartika Das that a person who has only applied for the shares of a company is not a complainant and he can be complainant only after allotment of such shares. Inclusion of consumer associations and organisations to represent or argue for consumers before consumers courts will benefit consumers. NGOs can represent consumers before consumers FORA. Complaint: [S. 2(1)(c)]. Complaint means any allegation in writing made by a complainant that (i) an unfair trade practice or a restrictive trade practice has been adopted by [any trader or service provider]; (ii) the goods bought by him or agreed to be bought by him]suffer from one or more defects; (iii) the services hired or availed of or agreed to be hired or availed of by him suffer from deficiency in any respect; (iv) a trader or the service provider, as the case may be, has charged for the goods or for the services mentioned in the complaint, a prior in excess of the price a) fixed by or under any law for the time being in force, b) displayed on the goods or any package containing such goods; c) displayed on the price list exhibited by him or under any law for the time being in force;
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d) agreed between the parties; (v) goods which will be hazardous to life and safety when used are being offered for sale to the public a) in contravention of any standards relating to safety of such goods as required to be complied with, by or under any law for the time being in force; b) if the trader could have known with due diligence that the goods so offered are unsafe to the public; (vi) Services which are hazardous or likely to be hazardous to life and safety of the public when used, are being offered by the service provider which such person could have known with due diligence to be injurious to life and safety;. With a view to obtaining any relief provided by or under this Act. Complaint means any allegation in writing before consumer courts with a view to obtaining any relief by or under the Act. Such complaint is made against the seller of the goods or service provider for their certain acts which are prejudicial to the interest of the consumer. This is the basis upon which prescribed courts under this Act exercise jurisdiction and grant relief to the complainant. So, procedure for getting relief under the provisions of the Act is very simple, what is required is a complaint in writing accompanied with documents relating to sale or supply of service. There is no need of court fees or service of an advocate, etc. This is in furtherance of the objective of the Act. It will be relevant to mention here that this act is a Social Legislation and one of the inherent objectives of such social welfare measures is to provide better, efficient and cheaper services to the people. Originally the scope of the complaint was confined only with respect to goods and services. But by amendment in 1993 and 2002 is scope has been widened and now it includes an unfair trade practice, a restrictive trade practice or goods or services which are hazardous or likely to be hazardous to life and safety of the public. The purpose is to protect the public from mal-practices of the busineSecs. Consumer [S.2 (1)(d)] Consumer means any person who i) buys any good for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any user of such goods other than the person who buys such goods for consideration paid or promised or partly paid or partly promised, or under any system of deferred payment, when such use is made with the approval of such person, but does not include a person who obtains such goods for resale or for any commercial purpose; or
ii) [hires or avails of] any services for a consideration which has been paid or promised or partly promised, or under any system of deferred payment and includes any beneficiary of such services other than the person who
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[hires or avails of] the services for consideration paid or promised, or partly paid and partly promised, or under any system of deferred payment when such services are availed of with the approval of the first mentioned person [But does not include a person who avails of such services for any commercial purpose]; [Explanation - For the purposes of this clause, commercial purpose does not include use by a person of goods bought and used by him and services availed by him exclusively for the purposes of earning his livelihood by means of self-employment]. The crux of the Act to provide protection to consumers. So protection of consumer is the sole subject matter of this Act. As we have seen that one of the category of complainant is a consumer. So the definition of consumer is not only significant but vital for the purposes of the Act. Who is a Consumer? Consumer is a person who buys any commodity to consume either as stable or otherwise from a shop, business house, corporation, store fair prices shop. In Oxford Dictionary a consumer is defined as a purchaser of goods or services. In Blacks Law Dictionary it is explained to mean, one who consumers, individuals who purchase, use, maintain and dispose of products and services. S.2(1)(d) of the Act defines consumer. This definition contains two parts. The first deals with goods and the other with services. Both parts declare the meaning of goods and services by use of wide expression. Their ambit is further enlarged by use of exclusive clause. For instance, it is not only purchaser of goods or hirer of services but even those who use the goods or who are beneficiaries of services with approval of the person who purchased the goods or who hired services are included in it. In Murugan Stanley Mutual Fund V. Kartika Das, Supreme Court has defined consumer. The consumer, as the term implies, is one who consumers. As per the definition, consumer is the one who purchases goods for private use of consumption. The meaning of the word consumer is broadly stated in the above definition so as to include any one who consumes goods or services at the end of the chain of production. The comprehensive definition aims at covering every man who pays money as the price or cost of the goods and services. Thus any person who: 1. buys goods for consideration or 2. hires or avails of any service for consideration is a consumer. 5.1.5 Analysis of the Scheme of the Act Any person, Here the term person has been used in a very wide sense. It means any individual, corporate body, firm, or any group of association or persons. So far as the scheme of the Act it includes any individual,
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company registered under Companies Act, corporation, firm or societies registered under Societies Registration Act, group of persons, or any association of persons. So a club, religious endowment; any Institution or Institute will be covered under this expression. For consideration: To bring the case within the ambit of this act it is necessary that goods bought or services availed of must be for consideration. Here the meaning and scope of consideration is the same as defined in Contract Act. Payment of tax which goes into the general revenue of the state or local authority will not legally constitute payment of consideration for any specific service. The maintenance of public roads and highways by the Government may be considered to be a service but the road using public cannot be considered to have hired this service for consideration. A person who goes to receive medical treatment in a Government Hospital is not a consumer. For the purposes of the Act consumers may be classified: i) As to goods (buyer of goods) and ii) As to services (hirer of services) i) As to Goods [S. 21(1)(d)(i)] 1. Buyer of Goods Any person, who buys goods for consideration, is a consumer. Any person who buys any goods for consideration which has been paid, or promised or partly paid and partly promised or under any system of deferred payment is a consumer. Thus, any buyer of goods for consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment such as Hire-Purchase system or Installment sale. Buyer means any person who buys or agrees to buy goods. Here it is clear that position of a buyer depends upon contract of sale. Contract of Sale is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. Under Sale of Goods Act a transaction to be a sale, it is necessary that property in goods (ownership) must be transferred for price. Price must be in terms of money. But for the purpose of Consumer Act the transfer must be for consideration. It need not be in terms of money. So transactions of transfer for services, or barter, or exchange will come under the purview of this Act and such transferee will be a consumer. Consideration must be there whether it is actual paid or promised to pay. In view of the above it is clear that the term buyer has been used in a wide important and it includes a transferee under Exchange, Barter, lease, Hire purchase system, Conditional Sale and like any other transaction. It is also to be noted that the term transfer does not limited only to goods but it also includes transfer of other property such as immovable property like building, etc. This point may be explained by quoting few cases.
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In Mohan Sharma v. Chandigarh Bottling Co. the complainants purchased 5 crates of Limca for Rs.440 for serving the same to the guests on marriage of his daughter. After consuming the drink the guests were taken ill and started vomiting. The bottles were got examined and found that some foreign particles and fungus were therein. The District Forum directed the refund of the amount paid for and Rs.200 as compensation. In appeal State commission increased the compensation to Rs.5000. In another case Akhil Bhartiya Grahak Panchayat v. M/s. Meghna Metals & Another, the complainant purchased one Prestige Pressure Cooker manufactured by opposite party. In spite of special Gasket system for safety in the cooker, the cooker burst and the same resulted in damage to the right hand of the complainants wife. The opposite party was directed to pay compensation of Rs.1,00,000 and to reimburse the medical bills. A person, got allotted a constructed house on Hire Purchase system by Gorakhpur Development Authority. It was found that sub-standard materials have been used and the house is not up to mark. He is a consumer and can complaint for the same before consumer court against Gorakhpur Development Authority. 2. User of Goods The other category of consumer in respect to goods is user of the goods. Consumer includes any user of goods other than the person who buys goods for consideration paid or promised or partly paid or partly promised, or under any system of deferred payment, when such use is made with the approval of such person. With the Approval of Buyer Any person who uses goods with the approval of the buyer is also consumers provided that such buyer must have bought the goods for consideration. So all the family members who use the goods are consumers. Here consent of the buyer for the use of his family members or invites or guest, is implied. So a guest who uses goods with the consent of such buyer is also a consumer. Beneficiary of a Contract: In Malkiat Singh v. New Insurance Co. Ltd, 2000 (1) CPJ 356, has been held that beneficiary of a contract is a consumer, hence entitled to file complaint. ii) As to Services [S.2 (1) (d) (ii)] 3. Hirer of Services Any person who hires or avails of any services for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment. Thus, any person who hires or avails of any service for consideration is a consumer. The term Service has been defined under S. 2(1)(0). It includes service of any kind rendered for consideration (See supra). In society there are so many fields in which services are rendered by individuals, institutions whether private or statutory specially by Banks, Telephone Department, Post Offices, Insurance, whether life or general,
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Railways, Doctors, Caterers, Contractors, Transport Operators, Engineers, etc. for consideration. Persons availing or using services of them are consumers. In Union of India v. Mrs. S.Prakash, it has been held that the subscribers of telephone are a consumer. As the rental charges paid to the Central Government is the consideration for the services rendered by the Telecommunication Department. A customer of a Bank is a consumer. A person who obtains Bank Draft from a Bank is a consumer. A person who hires services of caterers in the marriage is consumer. A person after buying ticket from Railway window travels by train is a consumer. 4. Beneficiary of Services In respect of services, the beneficiary of such service is also a consumer. It includes any beneficiary of such services other than the person who hires or avails of the services for consideration paid or promised, or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of such person. 5. Deemed Consumer The new concept of deemed consumer has been evolved by the Supreme Court in Regional Provident Fund Commissioner v. Shiv kumar Joshi [A.I.R.2000 SC 331], it was held that the facilities provided by the Scheme under the provident Fund Act were Service. It was further held that even if the administrative charges for running the Scheme are paid by the Central Government and no part of it is paid by the employee, the services of the Provident Fund Commission in running the Scheme shall be deemed to have been availed of for consideration by the Central Government for the benefit of the employees who would be treated as beneficiaries within the meaning of that word used in the definition of consumer. After considering the entire Scheme as provided under the Employees Provident Fund Act, the S.C. held that it was a service within the meaning of S.2 (1) (0) of the Act. It was further held that the member of the Scheme is a consumer within the meaning of section 2(1)(d) of the Act. Approval of Hirer Any person availing any service with the approval of hirer is a consumer. So a tenant using the facilities of telephone, electricity or water supply with the approval of landlord is a consumer. The term beneficiary includes all persons using such service with the approval of hirer. A Guest or Licensee is also consumer. In Nagpur Improvement Authority v. T.D.Vankhede, it has been decided that beneficiaries are consumers. In L.I.C. v. B.S.Reddy, the National Commission decided that services of Life Insurance Municipal Corporation are also service. So supply of contaminated water is subject of this Act. Illustrations may be many in various fields.
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In Spring Meadows hospital v. Harjot Ahluwalia, it has been decided that the patient and his relatives who are in the service of the patient are consumer. So mother and father of ailing son getting treatment are also consumer. We may put consumer in the following heads: 1. Buyer of goods 2. User of the goods 3. Hirer of services 4. Beneficiary of services 5. Buyer for earning his livelihood (see in the heading commercial purpose). Exceptions (who is not consumers) The following are not consumers; 1. Buyer of the goods without consideration. 2. Hirer of services without consideration. 3. Services free of charge. 4. Contract of personal services. 5. Buyer for resale. 6. Buyer for commercial purpose. 1. Buyer of the goods without consideration It is clear from the provisions of the Act that to be consumer one must buy goods for consideration. So, any one gets goods without consideration is not a consumer, i.e. anyone who gets goods under a reward, or under a clearance sale or under scheme of free sale or gift is not a consumer. A person who receives movable or immovable property under gift will not be a consumer because he gets such thing without consideration. Here it is also noted that any person who uses such goods with the consent of the person getting it will also not be a consumer. For example, A under a sale scheme gets free a Hawkins Pressure cooker at the time of buying a Hero Honda motor cycle. A `s wife right hand is damaged while using the Pressure Cooker since it was defective. Here A or A`s wife is not a consumer within the meaning of the Act, so he/she is not entitled for damages. 2. Hirer of service without consideration On the analogy of hirer of this service for consideration it is obvious that one who avails of any service without consideration is not a consumer. So providing free transport facilities or medical facilities or any service by any person or institution will not be under the purview of this Act and user of such services will not be a consumer. 3. Services Free of Charge Any person who avails of service free of charge will not be a consumer. This exception comes from the definition of service under S.2 (1) (0). It provides: rendering of any service free of charge or under a contract of personal service.
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There are so many charitable, religious or welfare societies which render services free of charge for the sake of humanity or in the service of society. Such activities do not come within the purview of this Act. 4. Contract of Personal Services Definition of service also excludes contract of personal services from the jurisdiction of this Act. Contract of personal service does not constitute consumer dispute. The term contract of personal service has not been defined in the Act but such contracts are quite different from commercial services. Supreme Court has made nice distinction between contract for service and contract of service in V.P.Santha Case. The former is subject matter of this Act whereas the later is not. Contract for Service Contract for service implies a contract whereby one party undertakes to render services e.g. professional or technical services to or for another in the performance of which he is not subject to detailed direction and control but exercise professional or technical skill and uses his own knowledge and decision. This is subject-matter of this Act. Contract of Service Contract of service implies a relationship of a master and servants and involves the order to obey in the works to be performed and as to its mode and manner of performance. This is not subject matter of this Act. 5. Buyer for Re sale The definition of consumer do es no t include a person who obtains such goods for resale or for any commercial purpose. Where goods have been bought for the purpose of resale, such buyer of the goods is not a consumer. If a retailer buys goods from wholesale dealer for the purpose of resale, he will not be a consumer, but when he buys for consumption, will be a consumer. Where goods have been bought for resale or consumption is a matter of fact depending on facts, circumstances of the case and conduct of the parties. The raw materials imported with the object to manufacture finished goods for resale. It is a commercial purpose. Manufacture is not a consumer. 6. Commercial purpose This is the last and most important exception. By the definition it is clear that a buyer of goods for commercial purpose is not a consumer. The term, Commercial purpose has not been defined in the Act. In absence of a definition we have to go by its ordinary meaning, commerce denotes pertaining to commerce. According to Chambers Twentieth Century Dictionary. It means connected and with or engaged in commerce.
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5.1.6 Consumers Protection Councils The object of the Act is to protect the interest of consumers and for that purpose Consumer Councils and Remedial Agencies have been established under the provisions of the Act. To quote the objects and reasons of the Act: The Consumer Protection Bill, 1986 seeks to provide for better protection of the interest of consumers and for that purpose, to make provision for the establishment of consumer councils and other authorities for the settlement of consumer disputes and for matters connected therewith. Thus, the Act provides: 1. Establishment of the Consumer Councils. 2. Establishment of the Remedial Agencies. Classes of councils 1. The Central Consumer Protection Council 2. The State Consumer Protection Council 3. The District Consumer Protection Council. It is, therefore, clear that the Act provides establishment of councils at three stages: National, State and District. (1) The Central Consumer Protection Council: Secs. 4, 5, 6 S.4 -The Central Consumer Protection Council 1. The Central Government shall by notification, establish with effect, such date as it may specify in such notification, a Council to be known as the Central Consumer Protection Council (hereinafter referred to as the Central Council) 2. The Central Council shall consist of the following members, namely: a) the Minister in charge of the [consumer affairs] in the Central Government, who shall be its Chairman b) such number of other official or non-official members representing such interests as may be prescribed. Composition of the Central Council The Central Government shall by notification establish a council to be known as the Central Consumer Protection Council. This council shall consist of a chairman and with such other official or non-official members as may be prescribed. The minister in-charge of the consumer affairs in the Central Government shall be Chairman. Rule 3 of the Consumer Protection Rules, 1987 provides: The Constitution of the Central Consumer Protection Council and the Working Groups 342
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1. The Central Government shall, by notification in the Official Gazette constitute the Central Consumer Protection Council (hereinafter referred to as the Central Council) which shall consist of the following members, not exceeding 150, namelya) the Minister in-charge of Consumer Affairs in the Central Government) who shall be the Chairman of the Central Council); b) the Minister of State (where he is not holding independent charge) of Deputy Minister (in-charge of Consumer Affairs in the Central Government) who shall be the Vice-Chairman of the Central Council; c) the Minister in-charge of Consumer Affairs in States; d) eight members of Parliament - five from the Lok Sabha and three from the Rajya Sabha; e) the Secretary of the National Commission for Schedule Castes and Schedule tribes; f) representatives of the Central Government Departments and autonomous organisations concerned with consumer interest - not exceeding twenty; g) representatives of the Consumer Organisations or consumers - not less than thirty five; h) representatives of women - not less than ten; i) persons capable of representing consumer interest and specified above - not exceeding fifteen; k) the [Secretary in-charge of Consumer Affairs in the Central Government]shall be the member-secretary of the Central Council. 2. The term of the Council shall be three years. 3. Any member may, by writing under his hand to the Chairman of the Central Council, resign from the Council. The vacancies so caused or otherwise, shall be filled from the same category by the Central Government and such person shall hold office so long as the member whose place he fills would have been entitled to hold office, if the vacancy had not occurred. 4. For the purpose of monitoring the implementation of the recommendations of the Central Council and to suggest the working of the Council, the Central Government may constitute from amongst the members of the Council, a Standing Working Group, under the chairmanship of the Member Secretary of the Council. The Standing Working Group shall consist of not exceeding 30 members and shall meet as and when considered necessary by the Central Government. Standing Working Group For the purpose of monitoring the implementation of the recommendations of the Central Council and to suggest the working of the council, the Central Government may constitute from amongst the members of the council, a Standing Working Group, under the chairmanship of the Member-Secretary of the council.
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The Standing Working Group shall consist of not exceeding 30 members and shall meet as and when considered necessary by the Central Government. Procedure of the Central Council Section 5 and Rule 4 provide procedure as follows: 1. The Central Council shall meet as and when necessary, but at least one meeting of the council shall be held every year. 2. The Central Council shall meet at such time and place as the Chairman may think fit and shall observe such procedure in regard to the transaction of its business as may be prescribed. Rule 4 - Under sub-section (2) of section 5, the Central Council shall observe the following procedure in regard to the transaction of its business 1. The meeting of the Central Council shall be presided over by the Chairman. In the absence of the Chairman, the Vice-Chairman shall preside over the meeting of the Central Council. In the absence of the Chairman and the Vice-Chairman, the Central Council shall elect a member to preside over that meeting of the Council. 2. Each meeting of the Central Council shall be called by giving, not less than ten days from the date of issue, notice in writing to every member. 3. Every notice of meeting of the Central Council shall specify the place and the day and hour of the meeting and shall contain statement of business to be transacted threat. 4. No proceedings of the Central Council shall be invalid merely by reasons of existence of any vacancy in or any defect in the constitution of the Council. 5. For the purpose of performing its functions under the Act, the Central Council may constitute from amongst its members, such working groups as it may deem necessary and every working group so constituted shall perform such functions as are assigned to it by the Central Council. The findings of such working groups shall be placed before the Central Council for its consideration. 6. The non-official members shall be entitled to first class or second Air conditioned by all trains (including Rajdhani Express) to and for Railway fare or actual mode of travel whichever is leSecs. Out-station nonofficial members shall be entitled to a daily allowance of one hundred rupees per day for attending the meetings of the Central Council or any working group. Local non-official members shall be paid actual conveyance, hire charges subject to a ceiling of Rs.75.00 per day irrespective of the classification of the city. Members of the Parliament shall be entitled to traveling and daily allowances at such rates as are admissible to such members. 7. The resolution passed by the Central Council shall be recommendatory in nature.
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S.6. Objects of the Central Council - The objects of the Central Council shall be to promote and protect the rights of the consumers such as a) the right to be protected against the 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 consumer against unfair trade practices; c) the right to be assured, wherever possible, access to a variety of goods [and services] at competitive prices; d) the right to be heard and to be assured that consumers interests will receive due consideration at appropriate FORA; e) the right to seek redressal against unfair trade practices [or restrictive trade practices] or unscrupulous exploitation of consumers and f) the right to consumer education. Objects of the Central Council have been expressed as The Charter of Protection of Consumer Rights which may be grouped in the following heads: 1. The right to be protected, 2. The right to be informed, 3. The right to be assured, 4. The right to be heard, 5. The right to be seeks redressal, 6. The right to be consumer education. (2) The State Consumer Protection Council: Secs. 7, 8 S.7 1. [The State Government shall], by notification, establish with effect from such date as it may specify in such notification, a Council to be known as the Consumer Protection Council for thereinafter referred to as the State Council. 2. The State Council shall consist of the following members, namely a) the Minister - in-charge of consumer affairs in the State Government who shall be its Chairman; b) such member of other official or non-official members representing such interests as may be prescribed by the State Government. c) such number of other official or non-official members, not exceeding ten, as may be nominated by the Central Government. 3. The State Council shall meet as and when necessary but not less than two meetings shall be held every year. 4. The State Council shall meet at such time and place as the Chairman may think fit and shall observe such procedure in regard to the transaction of its business as may be prescribed by the State Government.
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U.P. Consumer Protection Rules, 1987 has been enacted but it does not provide the number of members of official or non-official. S.8 Objects of the State Council - The objects of every State Council shall be to promote and protect within the State the rights of the consumers laid down in clauses (a) to (f) of section 6. (3) District Council: Secs. 8A, 8B The Provisions as to composition of District Council have been provided under sections 8A and 8B by Amendment Act, 2002. In the original Act there was no such provision. [8A.1. The State Government shall establish for every district, by notification, a council to be known as the District Consumer Protection Council with effect from such date as it may specify in such notification. 2. The District Consumer Protection Council (hereinafter referred to as the District Council) shall consist of the following members, namely a) the Collector of the district (by whatever name called), who shall be its Chairman and b) such number of other official and non-official members representing such interests as may be prescribed by the State Government. 3. The District Council shall meet as and when necessary but not less than two meetings shall be held every year. 4. The District Council shall meet at such time and place within the district as the Chairman may think fit and shall observe such procedure in regard to the transaction of its business as may be prescribed by the State Government. 8B. Objects of the District Council - The objects of every District Council shall be to promote and protect within the district the rights of the consumers laid down in clauses (a) to (f) of section 6.] 4) Nature of Consumer Council These consumer and other working groups have been established to make and suggest recommendation for better protection of consumers interest. Thus councils have only recommendatory nature. Its recommendation is not binding but only persuasive. Rule 4 provides that resolution passed by the Central Council shall be recommendatory in nature. Remedial Agencies or the Consumer Courts (Consumer -Disputes Redressal Agencies) This takes provision for the establishment of the Remedial Agencies, i.e., consumer courts for settlement of consumers disputes and for matters connected therewith. There is three-tier system in the Act. They are 1. a Consumer Disputes Redressal Forum to be known the District Forum, CDRF 2. a Consumer Disputes Redressal Commission to be known as the State Commission, SCDRC, and
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3. a National Consumer Disputes Redressal Commission to be known as the National Commission, NCDRC. Section 9 deals with establishment of these Redressal Agencies: S.9 Establishment of Consumer Disputes Redressal Agencies There shall be established for the purposes of this Act, the following agencies, namely a) a Consumer Disputes Redressal Forum to be known as the District Forum established by the State Government in each district of the State by notification; [Provided that the State Government may, if it deems fit, establish more than one District Forum in a district;] b) a Consumer Disputes Redressal Commission to be known as the State Commission established by the State Government in the State by notification and c) a National Consumer Disputes Redressal Commission established by the Central Government by notification. Comments i) One or more consumers can file complaint; Chief General Manager, Calcutta Telephones v. International Packers & Movers, 1 (1994) CPI 132: 1994 (1) CPR 252. ii) When no objection was taken to the territorial jurisdiction of District Forum by filling written version, the objection cannot be entertained in appeal raised orally; Essen Computers Ltd. v. Tagore Gracias, 1992 (II) CPR 556. iii) if a redressal forum has no jurisdiction, it cannot entertain the complaint on merits; Solvochen Intermediates Pvt. Ltd. v. Boilertech Engineers Pvt. Ltd. 1992 (II) CPR 322. Simple, Cheap and Speedy Remedy Thus, consumer courts have been established at three levels, i.e. District, State and National. They are known as: 1. District Forum ] 2. State Commission, and ] Consumer FORA 3. National Commission ] Provided that the State Government may, if it deems fit, establish more than one District Forum in a district. Consumer Protection Act, 1986 is a milestone in the way to provide cheap and speedy remedy. The object of the Act is to provide a simple, speedy and cheaper remedy for the protection of consumers. This has been insured in the mechanism and working of the Consumer Forum.
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After passing of the Consumer Protection Act, 1986, we find many such cases coming before the consumer FORA. The Consumer FORA are flooded with consumer cases because the justice is much less expensive and also much quicker. One need not pay any court fee, or engage a lawyer and Consumer FORA can evolve its own procedure to avoid unnecessary delay, which would otherwise be there in civil courts. Here it is relevant to mention that the Consumer Protection Act is social welfare legislation and the purpose of the legislation is to provide a better, efficient and cheaper remedy to the consumers. Consumers must be kept free from the complicated judicial proceedings and complicated obligations. Thus, the manner of getting remedy is quite informal, simple and free from the shackles and trappings of the civil courts. On the other hand, one has to wait for years and years for judgment and cost of litigation is also very high. The procedure for remedy under the Act is very simple and easy. It is free from procedural bindings of the court. No stamp paper, no court fees and no need of lawyers make the procedure of Consumer Fora very simple. Though Amendment Act, 2002 requires fees to be deposited by the complainants but the amount is nominal and that has to be provided by rules. Act also ensures speedy remedy. It should be kept in mind that Consumer FORA are free from the shackles and trappings of the court; it certainly helps in speedy remedy. Working of Consumer FORA has been simplified by Amendment Act, 2002 which makes working of the courts efficient. Provision of interim order is also a good sign in this respect. Act also provides that every complaint shall be heard as expeditiously as possible and endeavor shall be made to decide the complaint within a period of three months from the date of receipt of notice by opposite party where the complaint does not require analysis or testing of commodities and within five months if it requires analysis or testing of commodities. Cases of appeal shall be made to finally dispose of the appeal within a period of ninety days from the date of its admission. 5.1.7 Nature of Consumer FORA (COURTS) Quasi - judicial Consumer Protection Act, 1986 provides formation of the National Commission, the State Commission and the District Forum as Remedial Agencies. The purpose of these agencies is to decide consumer disputes. In this way the function of Consumer FORA becomes Quasi-judicial. This is supported by the provisions of S. 13(5) and S. 27(2) which provides: Every proceeding before the District Forum shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228 of the Indian Penal Code (45 of 1860) and the District Forum shall be deemed to be a civil court for the purpose of section 195, and Chapter XXVI of the Code of Criminal Procedure, 1973 (2 of 1974). This provision equally applies to the National Commission and the State Commission as well.
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Section 28(2) provides: Notwithstanding anything contained in the code of Criminal Procedure, 1973, the District Forum or the State Commission or the National Commission, as the case may be, shall have the power of a judicial Magistrate of the first class for the trial of offences under this Act, and on such conferment of powers, the District Forum, or the State Commission, or the National Commission, as the case may be, on whom the powers are so conferred, shall be deemed to be a judicial Magistrate of the first class for the purpose of the Code of Criminal Procedure, 1973. Keeping in view of the above provision it is clear that within the meaning of: a) Sections 193 and 228 of Indian Penal Code: 1. The District Forum shall be deemed to be a Civil Court, and 2. The proceeding before the District Forum shall be deemed to be judicial proceedings. b) For the purpose of Code of Criminal Procedure Code 3. The District Forum, the State Commission or the National Commission shall be deemed to be a judicial Magistrate of the first claSecs. 4. The District Forum or the State Commission or the National Commission shall have the power of a Judicial Magistrate of the first claSecs. Competence of the Parliament to create Parallel Civil Court This question was involved in State of Karnataka v. Vishwabharati House Building Co-operative Society. The Supreme Court held: Once it held that the Parliament had legislative competence to enact the Consumer Protection Act, the submission that the relevant provisions of the constitution required amendments must be neglected. The Parliament is empowered to establish hierarchy of courts like the District Forum, state commission and the National Commission parallel to the hierarchy of courts established under the constitution, namely, District Courts, High Courts and Supreme Court in the absence of suitable amendments made in the Constitution of India in terms of Article 368 thereof. The District Forum, the State Commission and the National Commission are not manned by lay persons. The President would be a person having judicial background and other members are required to have the expertise in the subjects such as economics, law, commerce, etc. It may be true that by reason of sub-section (2-A) of S. 14 of the Act in case of difference of opinion between two members the matter has to be referred to a third member and in rare cases, the majority opinion of the members may prevail over the president. But such eventuality alone is insufficient for striking down the Act as unconstitutional, particularly, when provisions have been made therein for an appeal to a higher forum. By reasons of the provisions of said Act, the power of judicial review of the High Court, which is a basic feature of the constitution, has not been nor could be taken away?
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Establishment of the Consumer FORA do Strike at Independence of the Judiciary? This constitutional question was involved in the same case. The Supreme Court held that the provisions of C.P.Act, 1986 do not strike at the independence if the judiciary. By reasons of provisions of S. 3 of the Act, it is evident that remedies provided there under are not in derogation of those provided under other laws. The said Act supplements and not supplants the jurisdiction of the Civil Courts or other statutory authorities. The said Act provides for a further safeguard to the effect that in the event a complaint involves complicated issues requiring recording of evidence of experts, the complainant would be at liberty to approach the Civil Court for necessary relief has, therefore, been provided under the Act itself. The provisions of the Act are required to be interpreted as broader, as possible. It has jurisdiction to entertain a complaint despite the fact the other Forum/Courts would also have jurisdiction to adjudicate the list. Forum is Competent to Decide Complex Issues A very significant ruling given by Supreme Court in J.J.Merchant v. Shrinath Chathurvedi that National Commission is required to be headed by a retired Judge of the Supreme Court and the State Commission is required to be headed by a retired High Court judge. They are competent to decide complicated issues of law or facts. Hence, it would not be proper to say that in cases where negligence of experts is alleged consumers should be directed to approach the Civil Court, it would also be totally wrong assumption that because the summary trial is provided, justice cannot be done when some questions of facts are required to be dealt with or decided. The Act provides sufficient safeguard. The Learned Counsel Mr.Nariman submitted that since complicated question of law and facts involved in this case depending upon medical experts opinion summary procedure is not proper remedy for deciding such issues, hence complainant should be directed to approach the Civil Court. This argument was not accepted by the Supreme Court. Supreme Courts observation was: It is no doubt true that sometimes complicated questions requiring recording of evidence of experts may arise in complaint about deficiency in service based on the ground of negligence in rendering medical services by a medical practitioner, but this would not be so in all complaints about deficiency in rendering services by a medical practitioner. There may be cases which do not raise such complicated questions and the deficiency in service may be due to obvious faults which can be easily established such as removal of the wrong limb, or the performance of an operation on the wrong patient or giving injection of drug to which the patient is allergic. The issues arising in the complaints in such cases can be speedily disposed of by the procedure that is being followed by the consumer FORA and there is no reason why complaints regarding deficiency in service in such cases should not be adjudicated by the agencies under the Act, as examination or cross-examination of the witnesses. The commission can easily evolve a procedure permitting the party intends to
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cross examine by putting certain questions in writing and those questions also could be replied by such experts including doctors on affidavits. In case where stakes are very high and still party intends to cross examine such doctors or experts, there can be video conferencing or asking questions by arranging telephone conference and at the initial stage this cost should be borne by the person who claims such video conference. Further cross-examination can be taken by the commission appointed by it at the working place at such experts at a fixed time. S. 3 of the Act which prescribes that the provisions of the Act shall be addition to and not in derogation of the provisions of any other law for the time being in force, preserves the right of the consumer to approach the Civil Court for necessary relief. We are, therefore, unable to hold that on the ground of composition of the consumer FORA or on the ground of the procedure which is followed by the said FORA for determining the issues arising before than the service rendered by the medical practitioners are not intended to be included in the expression service as defined in Section 2(1)(0) of the Act. In a recent case CCI Chambers Co-op. Housing Society Ltd. v. D.C. Bank Ltd. [A.I.R.2004 S.C. 184] it was held that the decisive test is not the complicated nature of the questions of fact and law arising for decision. The anvil on which entertainability of a complaint by a Forum under the Act is to be determined is whether the questions, though complicated they may be, are capable of being determined by the summary enquiry, i.e. by doing away with the need of a detailed and complicated method of recording evidence. It has to be remembered that the FORA under the Act at every level are headed by experienced persons. The N.C. is headed by a person who is or has been a Judge of Supreme Court. The State Commission is headed by a person who is or has been a Judge of the High Court. Each District Forum is headed by a person who is or has been or is qualified to a District Judge. Mere complication either of facts or of law cannot be a ground for the denial of hearing by a Forum under the Act. No abuse of the Process In Synco Industries v. state Bank of Bikaner and Jaipur, the Supreme Court held that the National Commission was right in giving to the appellant liberty to move the Civil Court. This is an appropriate claim for a Civil Court to decide, and obviously, was not filed before a Civil Court, to start with because before consumer Forum, any figure in damages can be claimed without having to pay court fees. This, in that sense, is an abuse of the process of the Consumer Forum. 5.1.8 Limitations of the Consumer FORA The working of the District forum or the State Commission, or the National Commission is subject to the following conditions: 1. Summary Trial The purpose of the Act is to provide for better protection of the interest of consumers, to protect them from misconduct and exploitation in
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business and to protect them from unfair trade practices and for this to provide speedy and cheaper remedy. Thus, only those disputes which could be decided on the basis of complaints only, come within the jurisdiction of this Act. In this way the disputes which involve affidavit, evidences, examination and cross examination of witnesses are beyond the purview of this Act. The consumer FORA adopts summary trial inconformity with these objectives. In Har sinaran Po ult ry Farm v. Allahabad Bank, t he St at e Commission held that extremely complicated facts and contentious matters cannot be aptly, justly and legally decided by summary trial. In Shri Mashio R.Persira v. Shri Elesbo :Persira, it was concluded that the disputes which involve mixed facts and law, are not within the purview of this Act. The contentious matters are subject matter of civil suits which cannot be decided by Consumer Courts. Complicated matters and Summary Trial In J.J.Merchant v. Shrinath Chaturvedi (A.I.R.2002 S.C. 2931) it was argued that the complicated matters like service of medical practitioners which requires examination and cross-examination of witnesses cannot be decided in summary manner hence complainants should be directed to approach the Civil Court. This argument was negative by the Supreme Court and held that even there is mechanism in the Act to deal with these types of cases. 2. Sub-Judice Matters before Civil Courts The consumer FORA cannot exercise jurisdiction over sub-judice matters. Principles of Res Sub-judice have been provided under Section 10 of the Civil Procedure Code. According to it a suit must be stayed if the matter directly and substantially in issues it is also directly and substantially in issue in a previous suit that is pending. The object of this principle is to prevent two courts of concurrent jurisdiction from simultaneously trying two parallel suits in respect of the same matter in issue. It is to obviate conflict of decisions of two contradictory orders being passed in respect of the same subject matter between the same parties. The principle of sub-judice is an important limitation as to jurisdiction of the Consumer FORA. In Savita Chaudhary v. Dr. Ghanshyam Koche, the State Commission, Bombay decided that consumer FORA cannot entertain jurisdiction where the matter is already pending in any Civil Court. 3. Res Judicate Res Judicate is another limitation on exercise of jurisdiction by Consumer FORA. The rule of Res-judicate has been enunciated in Section 11 of Civil Procedure Code reads thus:
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No court shall try any suit or issue in which the matter directly and substantially in issue has been directly and substantially in issue in a former suit between the same parties, or between parties under whom they or any of them claim, litigating under the same title, in a court competent to try such subsequent suit or the suit in which such issue has been subsequently raised, and has been heard and finally decided by such court. Writ petition In this way where writ petition has been filed before High Court and was dismissed, subsequently a consumer cannot file complaint before consumer FORA. 4. Sovereign Functions An act done in exercise of Sovereign power is an act of state which cannot be questioned by municipal courts. Here distinction between acts done in exercise of what are usually leveled Sovereign powers and acts done in non-sovereign is significant. Though Sovereign immunity has no relevance in the present day as the Supreme Court in N.Nagendra Rao & Co. v. State of A.P. considered the question of vicarious liability of the Government for the negligence of its servants. Now earlier judgment of Supreme Court in Vidyavatis and Kasturi Lals cases has been overruled. But for the purpose of this Act services rendered or act done under Sovereign powers have relevance and such acts do not come within the purview of the Act. In view of the above principle the state has not been held liable for torts committed by its servants in the following cases. 1. 2. 3. 4. 5. Construction and Repair of Military Roads. Administration of Justice. Function of Police Administration. Negligence of officers in performance of statutory duties. Seizure of goods during war period, etc.
In Akhil Bharatiya Grahak Panchayat v. State of Gujarat, it has been decided that the courts exercise its powers within the exercise of its Sovereign powers, not for the stamp fees or court fees paid by the litigants. Official functions done by Government officials, are not service under Consumer Protection Act. Act of Government officials cannot at all fall within the purview of the Act. The Supreme Court in Regional Provident Fund Commissioner v. Shiv kumar joshi (A.I.R. 2000 S.C. 331), held that the services of the Provident Fund Commissioner in running the Scheme shall be deemed to have been availed of for consideration by the Central Government for the benefit of the employees who would be treated as beneficiaries within the meaning of the word used in the definition of consumer. The S.C. also held that, it is a service within the meaning of S. 2(1)(0) of the
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C.P.Act. The statutory complexion of Regional Provident Fund Commissioner was not accepted by the Supreme Court. This principle was followed by the Kerala High Court in Kerala State C0-operative Employees` Pension Board v. Consumer Dispute Redressal Forum, Idukki A.I.R. 2004 Ker. 57. Alternative Remedy - No Bar: Existence of Arbitration Clause Existence of alternative remedy is no bar for exercise of jurisdiction by the Consumer FORA. So existence of Arbitration Clause does not constitute bar for the exercise of jurisdiction. This question was involved in Udaipur Cement Works v. Punjab Water Supply & Sewerage Board, that whether mere existence of an arbitration clause ousts the jurisdiction of FORA? The National Commission held that mere existence of an arbitration clause should not come in the way of aggrieved party for seeking legitimate relief under the C.P.Act. 5. Breach of Contract Breach of contract has to be seen by the Civil Courts, it does not come within the purview of this Act. In Sahul Ahmad v. G.S.Sales Corporation & Ors. the failure of opposite party to supply generator after 30 days of payment. This transaction purely a sale transaction. Service of the opposite party is not hired. Failure to supply generator amounts to breach of contract. There was no deficiency in service. The complainant was not a consumer. Jurisdiction of consumer courts; nature and extent To start with the statement of objects and reasons and the scheme of 1986 Act, it is apparent that the main objective of the Act is to provide for better protection of the interest of the consumer and for that purpose to provide for better redressal mechanism through which cheaper, easier, expeditious and effective redressal is made available to consumers. To serve the purpose of the Act, various quasi-judicial forums are set up at the District, State and National level with wide range of powers vested in them. These quasi-judicial forums observing the principles of natural justice are empowered to give relief of a specific nature and to award, wherever appropriate, compensation to the consumers and to impose penalties for non-compliance of their orders. 5.1.9 Objects and purpose of the Act in Present Scenario Before proceeding further, it is useful to know the background, the objects and reasons and purpose for which the 1986 Act is enacted. Consequent upon Industrial Revolution and vase development and expansion in the filed of international trade and commerce, variety of consumer goods entered the market to meet the needs of the consumers and most of services like insurance, transport, electricity, housing, entertainment, finance and banking have been made available to the consumers. Well organized sectors of manufactures and traders with better energy and markets have emerged affecting relationship between the Traders and consumers. With the help and aid of media both electronic and print, the advertisements of goods and services in television,
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newspapers and magazines have created great impact and influence on the demand for the same by the consumers though there may be manufacturing defects or deficiencies or shortcomings in the quality, quantity and purity of the goods or there maybe deficiency in the services rendered. In the interest of the public and to protect the consumers, it became necessary to check adulterated and substandard articles in the market. Despite various other statutes such as Indian Contract Act, 1872, Sale of Goods Act, 1930, the Indian Penal Code, 1860, The standard of Weights and Measures Act, 1976 and the Motor Vehicles Act, 1988 etc. being in operation, very little could be achieved in the field of consumer protection. Though the MRTP Act, 1969 and the Prevention of Adulteration Act, 1954 provide relief to the consumers yet it become necessary to protect the consumers from the exploitation and to save them from adulterated and substandard goods and deficiency in service and to safeguard their interest. Art. 21 of the Constitution and Consumer Protection This is also in consonance with the guaranteed right to life and personal liberty under Article 21 of the Indian Constitution. The expression personal liberty in Article 21 is of widest amplitude and it covers a variety of rights which go to constitute the personal liberty of man. In Maneka Gandhi`s (A.I.R. 1981 S.C. 746) case the Supreme Court gave a new dimension to Article 21. It held that the right to live is not merely confined to physical existence but in includes within its ambit the right to live with human dignity. Right to live is not restricted to mere animal existence but it means something more than just physical survival. The right to live is not confined to the protection of any faculty or limb through which life is enjoyed or the soul communicates with the outside world but is also includes the right to live with human dignity, and all that goes along with it, namely, the bare necessities of life such as, adequate nutrition, clothing and shelter and facilities for reading, writing and expressing ourselves in diverse forms. General Assembly Resolution In General Assembly a Consumer Protection Resolution No.39/248 was passed and India is a signatory to this Resolution. The United Nations has passed a resolution in 1985 indicating certain guidelines under which the governments could make laws for better protection of the interest of the consumers and such laws were more necessary in developing countries to protect the consumer from hazardous to their health and safety and to make them available speedier and cheaper redreSecs. With this background, the 1986 Act was enacted. The statement of objects and reasons show that the Consumer Protection Bill, 1986 sought to provide for better protection of the interest of the consumers and for the purpose, to make provision for the establishment of consumer council and other authorities in the settlement of consumer disputes and for matters connected therewith. It seeks, inter alia, to promote and protect the rights of consumers such as protection against marketing of goods which
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are hazardous to life and property; the right to be informed about the quality, quantity, potency, purity, standard and price of goods to protect the consumer against unfair trade practice; the right to be assured, wherever possible, access to an authority of goods at competitive prices, the right to be heard and to be assured that the interest of consumers will receive due consideration at appropriate forums, the right to seek redressal against unfair trade practices or unscrupulous exploitation of consumers and right to consumer education. Speedy and Simple remedy The object is also to provide speedy and simple redressal to consumer disputes, a quasi judicial machinery is sought to be set up at the District, state and central levels. These quasi judicial bodies will observe principles of natural justice and have been empowered to give relief of specific nature and to award wherever appropriate, compensation to consumers. Penalties for non-compliance of orders given by the quasi judicial bodies have also been provided. The preamble of the Act declares that it is an Act to provide for better protection of the interest of consumers and for that purpose to make provision for the establishment of consumer councils and other authorities for the settlement of consumers disputes and matters connected therewith. Additional Remedy In Section 3 of the Act is clear and unambiguous terms, it is stated that the provisions of 1986 Act shall be in addition to and not in derogation of the provisions of the any other law for the time being in force. The scope and extent of Section 3 first time came for consideration before Supreme Court in the leading case Lucknow Development Authority v. M.K.Gupta (A.I.R.1994 S.C. 787), this Court observed thus: Supreme Courts view We therefore, come straightaway to the legal issue involved in these appeals. But before doing so and examining the question of jurisdiction of the District Forum, or State or National Commission to entertain a complaint under the Act, it appears appropriate to ascertain the purpose of the Act, the objective it seeks to achieve and the nature of social purpose it seeks to promote as it shall facilitate in comprehending the issued involved and assist in construing various provisions of the act effectively. To begin with the preamble of the Act, which can afford useful assistance to ascertain the legislative intention, it was enacted, to provide for the protection of the interest of the consumers. Use of the word protection furnishes key to the minds of the makers of the Act. Various definitions and provisions which elaborately attempt to achieve this objective have to be construed in this light without departing from the settled view that a preamble cannot control otherwise plain meaning of a provision. In fact, the law meets long felt necessity of protecting the common man from such wrongs for which the remedy under ordinary law for various reasons has become illusory. Various legislations and regulations permitting the state to intervene and protect interest of the consumers have become a
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haven for unscrupulous ones as the enforcement machinery either does not move or it moves ineffectively, inefficiently and for reasons which are not necessary to be stated. The importance of the Act lies in promoting welfare of the society by enabling the consumer to participate directly in the market economy. It attempts to remove the helpless of a consumers which he faces against powerful, business, described as, a net work of rackets or a society in which, the producers have secured power to rab the rest and the might of public bodies which are degenerating into storehouses of inaction where papers do not move from one desk to another as a matter of duty and responsibility but for extraneous consideration leaving the common man helpless, bewildered and shocked. The malady is becoming so rampant, widespread and deep that the society instead of bothering, complaining and fighting against it, is accepting as part of life. The enactment is these unbelievable yet harsh realities appear to be a silver lining, which may in course of time succeed in checking the rot. Further, in Fair Air Engineers Pvt. Ltd. v. N.K.Modi (A.I.R. 1997 S.C.533) Supreme Court after referring to LDA case (Supra), held that the provisions of the Act are to be construed widely to give effect to the object and purpose of the Act. It went on to say that it is seen that Section 3 envisages that the provisions of the Act are in addition to and are not in derogation of any other law in force. The words interrogation of the provisions of any other law for the time being in force would be given proper meaning and effect because Parliament was aware of the provisions of the Arbitration Act, the Contract Act, 1872 and the consequential remedy available u/s 9 of the Code of Civil Procedure, i.e. to avail a right of civil action in a competent Court of Civil jurisdiction, Nonetheless, the Act provides the additional remedy. Further dealing with the jurisdiction of the Forums under the 1986 Act, the Court observed: It would therefore be clear that the legislature intended to provide a remedy in addition to the consentient arbitration which could be enforced under the Arbitration Act or the Civil action in a suit under the provisions of the code of Civil Procedure. Thereby as seen, Section 34 of the Act does not confer an automatic right nor create an automatic embargo on the exercise of the power by the judicial authority under the Act. It is a matter of discretion. Considered from this prospective, we hold that though the District Forum, state and National Commission are judicial authorities for the purpose of Section 34 of the Arbitration Act, in view of the object of the Act and by operation of Section 3 these of, we are of the considered view that it would be appropriate that these forums created under the Act one at liberty to proceed with the matters in accordance with the provisions of the Act rather than relegating the parties to an arbitration proceeding pursuant to a contract entered into between the parties. The reason is that the Act intends to relieve the consumers of the cumbersome arbitration proceedings or civil action unless the forums on their own and on the peculiar facts and circumstances of a particular case come to the conclusion that the appropriate forum for adjudication of the disputes would be otherwise those given in the Act.
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Again in Spring Meadows Hospital and another v. Harjol Athluwalia (A.I.R.1998 S.C. 1801), this court having taken note of the background in which the 1986 Act came to be placed on the statue book, observed that the Act creates a framework for speedy disposal of consumer disputes and an attempt has been made to remove the existing evils of the ordinary court system. The Act being a beneficial legislation should receive a liberal construction. Further in Secretary, Thirumurugan Co-op. Agr. Credit Society v. Lalitha (A.I.R. 2004 S.C.448), this Court held that: From the statement of objects and reasons and the scheme of Consumer Protection Act, it is apparent that the main objective of the Act is to provide for better protection of the interest of the consumer and far that purpose to provide for better redressal mechanism through which cheaper, easier, expeditious and effective redressal is made available to consumers. As per Section 3 of the computer Act the provisions of any other law for the time being in force. Having due regard to the scheme of the Act and purpose sought to be achieved to protect the interest of the consumers, better the provisions are to be interpreted broadly positively and purposefully in the context of the present case to give meaning to additional/extended jurisdiction particularly when S. 3 seeks to provide remedy under the Act in addition to other remedies provided under other Acts unless there is clear bar. Supreme Court further observed Consumer Forum does not have jurisdiction to decide the dispute between members and co-operative society as neither S. 99 nor S.156 of the Tamil Nadu Co-operative Societies Act, 1983 ousts the jurisdiction of the consumer forum. The remedies that are available to an aggrieved party under the consumer protection Act are wider. For instance, in addition to granting a specific relief the forums under the C.P. Act have jurisdiction to award compensation for the mental agony, suffering etc., which possibly could not be given under the Act in relation to dispute under S. 90 of T.N. Co-operative Societies Act. Merely because the rights and liabilities are created between the members and the management of the society under the Act and forums are provided, it cannot take away or exclude the jurisdiction conferred under the Consumer Protection Act expressly and intentionally to serve a definite cause in terms of the objects and reasons of the C.P. Act. Therefore, the view taken by the National Commission that the provisions under the T.N. Co-operative Societies Act relating to reference of disputes to arbitration shall prevail over the provisions of the C.P. Act is incorrect and untenable. District forum (Remedial Agencies or consumer courts) S. 10 Composition of the District Forum - 1. Each District Forum shall consist of a) a person who is, or has been, or is qualified to be a District Judge, who shall be its President; b) two other members, one of whom shall be a woman, who shall have the following qualifications, namely;
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i)
be not less than thirty five years of age,
ii) possess a bachelors degree from a recognized university, iii) be persons of ability, integrity and standing, and have adequate knowledge and experience of at lease ten years in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or administration. Provided that a person shall be disqualified for appointment as a member, if he a) has been convicted and sentenced to imprisonment for an offence which, in the opinion of the State Government, involves moral turpitude; or b) is an undischarged insolvent; or c) is of unsound mind and stands so declared by a competent court; or d) has been removed or dismissed from the service of t he Government or a body corporate owned or controlled by the Government; or e) has, in the opinion of the State Government, such financial or other interest as is likely to affect prejudicially the discharge by him of his functions as a member; or f) has such other disqualifications as may be prescribed by the State Government)
(1A)- Every appointment under sub-section (1) shall be made by the State Government on the recommendation of a selection committee consisting of the following namely; i) The President of the state Commission - Chairman Member ii) Secretary, Law Department of the State iii) Secretary, in charge of the Department dealing with consumer affairs in the State - Member Provided that where the President of the State Commission is, by reason of absence or otherwise, unable to act as Chairman of the Selection Committee, the State Government may refer the matter to the Chief Justice of the High Court for nominating a sitting Judge of that High Court to act as Chairman. (2) Every member of the District Forum shall hold office for a term of five years or up to the age of sixty five years, whichever is earlier: Provided that a member shall be eligible for re-appointment for another term of five years or up to the age of sixty five years, whichever is earlier, subject to the condition that he fulfils the qualifications and other conditions for appointment mentioned in clause (b) of sub section (1) and such reappointment is also made on the basis of the recommendation of the Selection Committee.
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Provided further that a member may resign his office in writing under his hand addressed to the State Government and on such resignation being accepted, his office shall become vacant and may be filled by appointment of a person possessing any of the qualifications mentioned in sub-section (1) in relation to the category of the member who is required to be appointed under the provisions of sub-section (1A) in place of person who has resigned: Provided also that person appointed as the President or as a member, before the commencement of the Consumer Protection (Amendment) Act, 2002, shall continue to hold such office as President or member, as the case may be, till the completion of his term. 3) The salary or honorarium and other allowances payable to, and the other terms and conditions of service of the members of the District Forum shall be such as may be prescribed by the State Government. Provided that the appointment of a member on whole-time basis shall be made by the State Government on the recommendation of the President of the State Commission taking into consideration such factors as may be prescribed including the work load of the District Forum. Comments The pension received by the presidents of the District Consumer Forum in respect of their previous services as District Judge is subject to deduction from their salary as President of the Forum fixed under provisions of the Act; M.S.Chawla v. State of Punjab, A.I.R. 2001 S.C.1706. Suggestion: Authors view is that as to composition of the District Forum provisions of Section 10(1)(a) & (b) shall be substituted as follow : Not less than two, and not more than such number of members, as may be prescribed, and one of who shall be a woman, who shall have the following qualifications, provided that one member shall be from amongst persons having a judicial background. This provision will create credibility of the working and functioning of the District Fora and in all the cases functioning of the District Forum will be controlled by the persons having judicial background and in case where the President is absent the proceedings of the District Forum will be presided by a judicial person. Scheme of S. 10 may be discussed in the following heads: 1. Composition of District Forum. 2. Selection Committee for Composition. 3. Qualifications, disqualifications, salary, allowance of chairman and members. 4. Place of sitting and other matters. 5. Removal of members.
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1. Composition of District Forum District Forum shall consist of a) a person who is, or has been or is qualified to be a District Judge, who shall be its President b) two other members, one of whom shall be a woman The Whole time member Provided that the appointment of a member on whole-time basis shall be made by the State Government on the recommendation of the President of State Commission, taking into consideration such factors as may be prescribed including the work load of the District Forum. [Proviso of S. 10(3)] More than one District Forum By Amendment act, 1993 State Government may establish more than one district Forum in a district [S.9 (a) proviso]. 2. Selection committee (S.10 (1A)] Every appointment for District forum shall be made by the State Government on the recommendation of a selection committee consisting of the following, namely i) The President of the State Commission - Chairman ii) Secretary, Law Department of the State - Member iii) Secretary, in charge of the Department dealing with consumer affairs with state-Member. Provided that where the President of the State Commission is, by reason of absence or otherwise, unable to act as Chairman of Selection Committee, the State Government may refer the matter to the Chief Justice of the High Court for nominating a sitting Judge of that High Court to act as Chairman. The provision of Selection committee is a novel provision provided in the Act by Amendment Act, 1993 to remove the delay in constituting District Forum. 3. Qualifications of Chairman and Members Chairman [S.10 (1)(a)] : The Chairman of the District Forum must be a judge, or has been a judge, or is qualified to be a District Judge Members: The members shall have the following qualifications, namely: i) be not less than thirty years of age; ii) possess a bachelors degree from a recognised University; iii) be persons of ability, integrity and standing, and have adequate knowledge and experience of at-least ten years in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or administration. [S. 10(1)(b)] i) and (ii) have been added by Amendment Act, 2002.
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Disqualifications [S. 10(1)(b)] A person shall be disqualified for appointment as a member, if he a) has been convicted and sentenced to imprisonment for an offence which, in the opinion of the State Government , involves moral turpitude or b) is an undischarged insolvent or c) is of unsound mind and stands so declared by a competent court or d) has been removed or dismissed from the service of the Government or a body corporate owned or controlled by the Government or e) has, in the opinion of the State Government, such financial or other interests as is likely to affect prejudicially the discharge by him of his functions as a member or f) has such other disqualifications as may be prescribed by State Government. Those disqualifications have been added by Amendment Act, 2002. Removal In addition to provisions of S. 10(2), State Government may remove from the office, the president and member of a District Forum who: (Rule 3(5) of U.P. Consumer Protection Rules, 1987): a) has been adjudged an insolvent or b) has been convicted of an offence which in the opinion of the State Government, involved moral turpitude or c) has become physically or mentally incapable of acting as such member, or d) has acquired such financial or other interest as is likely to affect prejudicially his functions as a member or e) has so abused his position as to render his continuance in office prejudicially to the public interest: Provided that the president and member shall not be removed from his office on the ground specified in clauses (d) and (e) in sub-rule (5) except on an enquiry held by State Government in accordance with such procedure as it may specify in this behalf and finds the member to be guilty of such ground. g) The President or any member ceasing to hold office as such shall not hold any administration of an organisation which has been the subject of any proceeding under the Act during his tenure for a period of 5 years, from the date on which he ceases to hold such office. Rule 3(9). Before appointment, the president and members of the D.F. shall have to take an undertaking that he does not and will not have any such financial or other interests as is likely to affect prejudicially. Transfer of President/Member As regards transfer of President/Member of the District Forum no provision has been provided in the Act but it has been upheld by the Supreme Court in State of Rajasthan v. Anand Prakash Solanki (2002 A.I.R.S.C.W 4418), merely because there is no cadre as such of the President and the members of the District Forum, it cannot be said that the President/Members of the District Forum are not liable to be
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transferred. As District FORA, more than one is a constituted within the state there is nothing wrong in the President or Members of one District Forum being appointed by transfer to another D.F. subject to the requirement of sub-section (1A) of S. 10 being satisfied. Such appointment by transfer shall be made by the State Government but only on the recommendation of the committee consisting as per sub-section (1A) of S. 10. Such transfer cannot be a frequent or routine feature and such power is exercised in public interest or in such exigencies of administration. Transfer is an incidence of public service and the power to transfer is available to be exercised by the employer public service and the power to transfer is available to be exercised by the employer unless there is an express bar or restraint on the exercise of such power can be spelt out. The Supreme Court further held that power to appoint includes appointment by transfer and State Government as employer is competent to transfer on recommendations of committee constituted under S.10 (1A) of the Act. Duration [S.10 (2)] Every member of the District Forum shall hold office for a term of five years or up to the age of 65 years, whichever is earlier. Provided that a member shall be eligible for re-appointment for another term of five years or up to the age of sixty-five years, whichever is earlier, subject to the condition that he fulfils the qualifications and other conditions as above. Resignation A member may resign his office in writing under his hand addressed to the State Government and on such resignation being accepted his office shall become vacated may be filled by appointment as above mentioned in S.10(2): Provided further that a person appointed as the President or as a member, before the commencement of the C.P. (Amendment) Act, 2002 shall continue to hold such office as President or member, as the case may be, till the completion of his term. Salary [S.10 (3)] The salary or honorarium and other allowances payable to and the other terms and conditions of service of the members of the District Forum shall be as may be prescribed by the State Government. Rule 3 of U.P. Consumer Protection Rules, 1987 provide the salary or other allowances as: 1) The president of the District Forum shall receive the salary of the judge of a District Court if appointed on whole-time basis or an honorarium of Rs.150 per day if appointed on part-time basis. Other members if sitting on whole-time basis, shall receive a consolidated honorarium of Rs.2000 per month and if sitting on part-time basis, a consolidated honorarium of Rs.150 per day for the sitting.
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2) The President and the members of the District Forum shall be entitled for such traveling allowance and daily allowance on official tour as are admissible to Grade I officers of the State Government. 3) The salary, honorarium and other allowance shall be defrayed out of the consolidated fund of the State Government. The terms and conditions of the service of the president and the members of the District Forum shall not be varied to their disadvantage during their tenure of office. 4. Salary of the President of District Forum There is no doubt that if any RHJS officer has been appointed as President of the District Consumer Forum, he gets the same salary including perquisites, allowance and benefits as were payable to him as a judge of the District Court. This becomes terms and conditions of his service. But all are not getting the same salary, which depends upon how senior he is in service. After earning increment the senior District Judge may get higher pay than the District Judge who has recently been promoted or appointed. There is difference in the amount of salary of Judge of District Court. The amount depends upon his seniority in Rajasthan Higher Judicial Service, though both are called the judges of the District Court. The amount of salary of President of District Forum will be the amount he was getting in RHJS at the time of appointment in Consumer Forum as President of District Consumer Forum (State of Rajsasthan v. Shyam Sunder Gupta, A.I.R.2003 NOC 577 Raj]. In M.S.Chawla v. State of Punjab it was held that the pension received by the Presidents of the D.F. in respect of their previous services as District Judges is subject to deduction from their salary as President of the Forum fixed under provisions of the Act. 5. Establishment of Forum: Mandatory The word used in S. 10 of the Act, shall indicates that it is the duty of state to constitute District Forum in Districts is mandatory provision. In public interest litigation, it was alleged that District Forum were not set up in all the districts. The Supreme Court by its order dated 5.8.91 directed that only in those districts where minimum monthly load was less than 150 cases consistently for a period of six months, it would be open to the State/U.T. to continue the arrangement of sitting District Judge as the President of districts must have regular District Forums. In view of this ad-hoc or stop-gap arrangements, most of the states showed total lack of sense of urgency for setting up regular district-wise fora as envisaged by the Act and insisted upon by the Supreme Court. The High Courts showed their inability to spare the District Judge for the said adhoc arrangement for a long time in view of pressure of regular work. Hence, directions issued by the S.C. Inter alia that workload exceeds minimum monthly 150 cases for six months, the High Court will convey the same to the state District / U.T. which will appoint a regular District Forum within 6 months. Where workload does not exceed the minimum so fixed, the ad-hoc arrangement may continue for one year during which
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period Government will constitute a regular District Forum. (Common cause, A.Registered Society v. Union of India, A.I.R. 1997 S.C.). Jurisdiction of the district forum (S.11) 5. S. 11 Jurisdiction of the District Forum 1. Subject to the other Provisions of this Act, the District Forum shall have jurisdiction to entertain complaints where the value of the goods or services and the compensation, if any, claimed [does not exceed rupees twenty lakhs. 2. A complaint shall be instituted in a District Forum within the local limits of whose jurisdiction a) the opposite party or each of the opposite parties, where there are more than one, at the time of the institution of the complaint, actually and voluntarily resides or [carries on business or has a branch office or] personally works for gain, or b) any of the opposite parties, where there are more than one, at the time of the institution of the complaint, actually and voluntarily resides, or [carries on business or has a branch office], or personally works for gain, provided that in such case either the permission of the District Forum is given, or the opposite parties who do not reside, or [carry on business or have a branch office], or personally work for gain, as the case may be, acquiesce in such institution, or c) the cause of action, wholly or in part, arises, The Act provides jurisdiction of D.F. (to hear and try) the complaints as follows: 1. Pecuniary Jurisdiction and (S. 11(1)) 2. Local or Territorial Jurisdiction (S.11 (2)) 3. Other Jurisdiction (Rule 10 of Consumer Protection Rules, 1987). 1. Pecuniary Jurisdiction The District Consumer Forum shall have jurisdiction to entertain complaints where the value of the goods or services and the compensation, if any claimed does not exceed rupees twenty lakhs. [Originally this pecuniary jurisdiction was rupees one lakh which was raised up to rupees five lakhs by Amendment Act, 1993.] Thus, scheme of pecuniary jurisdiction may be explained 1. value of the goods, or 2. value of the services, and 3. value of the compensation So, it is clear that either the value of goods or services including the value of the compensation, if any must be rupees twenty lakhs and not more. If it becomes rupees twenty lakhs and one, the jurisdiction will be shifted to State Commission. In Public Health Engineering Department v. Consumer Protection Samiti,
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the complainants suffered from Jaundice as they used contaminated water supplied by the municipality. The value of claimed compensation of each person was Rs.10,000 and which in total comes more than one lakh. It was held by the National Commission that complaint was beyond the jurisdiction of the District Forum. It should be noted here that prepositions or and and have been used between, I, II, & III respectively. It means value of goods or services including compensation must be of Rs. 20 lakhs. In Premier Automobiles Ltd. v. Dr. Manoj Ram Chandran & others, the matter before the National Commission was that the increase in pecuniary limit will have any effect on jurisdiction as to pending complaints? It was decided by the National Commission in negative. The amendment as to pecuniary jurisdiction has prospective effect. It does not apply retrospectively. Thus such amendments will have no effect on pending cases. 2. Local or Territorial Jurisdiction As to purposes of the Act local or territorial jurisdiction may be: i) where opposite party resides or carry on business : The opposite party or each of the opposite parties, where there are more than one at the time of the institution of the complaint, actually and voluntarily resides or carries on business or has a branch office or personally works for gain or
ii) any of the opposite parties, where there are more than one at the time of institution of the complaint, actually and voluntarily resides, or carries on business or has a branch office or personally works for gain, provided that in such case either, a) the permission of the District Forum is given or b) the opposite parties who do not reside, or carry on business, or have a branch office, or personally work for gain, acquiesce in such institution or iii) the cause of action, wholly or in part, arises. Normally District Consumer Forum will exercise its jurisdiction within the limits of its district and where there are more than one district forum in that case such forums will exercise their jurisdiction subject to the local limits as may be prescribed. In State of Punjab v. Nanak Chand, it was held that as regards manufactured goods cause of action also arises as to place where goods have been put to market. 3. Territorial jurisdiction of District Forum S. 11 were aptly discussed in Lucky Forwarding Agency V. Smt. Binder Devi. (A.I.R.2003 M.P.261) In this writ petition the petitioner Lucky Forwarding Agency, a registered partnership firm engaged in Commission Agency at Lucknow and has no branch office anywhere in the country. All the partners of the petitioner
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firm reside at Lucknow and none of them voluntarily resides or carries on business at Rewa. As a Commission Agent, the job of petitioner is to arrange trucks for transportation of goods. The complainant A had sent his representative to Uttar Pradesh to purchase 240 quintals of sugar from Kishan Sahkar Sugar Mills Ltd. Mehmudabad, District Sitapur (U.P). Representative of the complainant engaged the petitioner at Lucknow and asked him to arrange trucks for transportation of sugar. The trucks were arranged one of them did not reach safely and ultimately goods loaded on that truck did not reach the destination at Rewa. Late Shri Moolchand filed a complaint in the District Forum at Rewa indicating that the petitioner was responsible for safe delivery of goods at Rewa and as the same was not delivered the petitioner was guilty of deficiency in service as defined in S. 2 (g) of the Act. The opposite party (petitioner) objected filing of complaint at Rewa. It was pointed out that S. 11 of the Act was not attracted to this case as it did not disclose that the cause of action wholly or in part to have been arisen within the local limits of Rewa. The District Forum Rewa lack territorial jurisdiction, hence complaint is not maintainable at Rewa. After the death of original complainant the legal heirs were substituted. The District Forum decided the dispute and directed payment of Rs.1, 41,000 towards cost of sugar long with interest at the rate of 6% per annum. On appeal before the State and National Commission, order passed by the D.F. was affirmed, hence this writ petition for issue of writ of certiorari for quashment the order passed by the D.F. and affirmation thereof by the State and National Commission. The High Court held that since the goods were sent from Mehmudabad and the same was to be delivered at Rewa and therefore, the complaint was rightly entertained by the District Forum at Rewa. The stance of the petitioner that the D.F. at Rewa had no territorial jurisdiction is sans substance, consequently, the writ petition, being devoid of merit, stands dismissed. Jurisdiction Clause In Prakash Roadlines Ltd. V. M/s. Micron Instruments pvt. Ltd. The finding of the District Forum that the consignee is maintaining its office at Chandigarh and that the goods were despatched for Chandigarh, the Forum here rightly had the territorial jurisdiction at Chandigarh. The State Commission did not think proper to interfere. The appellants argument that the transaction was subject to Bangalore jurisdiction was not accepted. As to jurisdiction clause Kashi Ram v. Maruti Udyog Ltd. case is also notable. It is found that the District Forum, Bilaspur in the facts and circumstances of the case has jurisdiction otherwise u/s 11 of the Act to decide the complaint, the court should not readily infer about the exclusion of the jurisdiction of the District Forum. If two interpretations are possible, the interpretations which go in favour of the consumer, should normally be adopted by the courts. We have scrutinised clause 10 of the affidavit reproduced above and in our opinion the jurisdiction to try the complaint does not vest exclusively in the courts at Chandigarh. No
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doubt, the word only has been used in the affidavit at the same time the second part of the clause itself permits the trial of the complaint outside the courts of Chandigarh as it further stipulates that in any case any complaint or petition is filed outside the courts of Chandigarh then the litigation cost incurred to fight the case shall be borne by him. The commission relied upon the judgment of L.D.A. v. M.K. Gandhi. The Supreme Court held that the provisions of the Act have to be construed in favour of the consumer to active the purpose of enactment as it is a social benefit-oriented legisaltion. The primary duty of the court while construing the provisions the said enactment is to adopt a constructive approach subject to that it should not do violence to the language of the provisions and is not contrary to attempted objectives of the enactment. Jurisdiction of District Forum was raised in recent case of Amercian Express Banks Ltd. v. Rajesh Gupta & ors. The petitioner after consultation from Americal Express Bank purchased Traverllers Cheque at Delhi from the banker of American Express Bank. The petitioner lost the Travellers cheque along with passport and other relevant documents at Delhi. The petitioner at the time of the filing of the refund claim was residing in New Delhi and also carried on business at Noida near New Delhi. The petitioner at the time of the filing of the refund claim was residing in New Delhi and also carried on business Noida near New Delhi. The petitioner on the basis of alleged dialogue at Calcutta with American Express Banks filed complaint at District Forum Calcutta. The National Commission held that since no part of the cause of action had arisen at Calcutta, therefore, District Forum Calcutta has no jurisdiction. It was held that the petitioners reference to his alleged dialogue or dealings in respect of Travellers cheques within the office of Calcutta was wrong, misleading, meaningless and concocted by the petitioner only with the aim of securing territorial jurisdiction of the Forum. 4. Other jurisdiction Rule 10 of National Consumer Protection Rules, 1987 provides the following additional jurisdiction of the National Commission, State Commission and District Forum. (1) Power to require any person (a) Production of Books, Accounts, Documents or Commodities Where such books, accounts, document or commodities are required for the purpose of this Act District Forum may require from such person in whose custody they are, for production of books, accounts, documents or commodities. (b) To Furnish Information The District Court may require furnishing to an officer so specified, such information. (c) Power to Entry and Search The District Forum may order any officer for entry and search of any premises if it has any ground to believe that any book, paper, commodity or document which may be required to be produced in such
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proceeding are being, or may be destroyed, mutilated, altered, falsified or secreted. (d) Order for Seizure The District Forum may also order for seizure of the above documents. (e) Order for Retention The National Commission, the State Commission of the District Forum, as the case may be, on examination of such seized documents or commodities, as the case, may order the retention thereof may return to the party concerned. Comments (i) Objections regarding territorial jurisdiction should be taken at the earliest opportunity or the same deemed to have been waived; Kurukshetra University v. Vinary Prakash Verma, II (1993) CPJ 647. (ii) A petition of complaint can be filed against corporation carrying on business within the territory of District Forum or Commission even though its sole or principal office is situated outside state limits; Consumer Education and Research Society v. Canara Bank, (1991) 1 CPR 405. Estoppel as to Jurisdiction It was held in Vikas Motor Ltd. v. P.K. Jain, that such party was estopped from raising the plea relating to jurisdiction at the SLP stage as he could not be permitted to approbate and reprobate at the same time after submitted to the territorial jurisdiction of the District Forum. 1. Manner in which Complaint shall be made Section 12 provides the manner in which complaint under the Act shall be made. Manner in which complaint shall be made 1. A complaint in relation to any goods sold or delivered or agreed to be sold or delivered or any service provided or agreed to be provided may be filed with a District Forum by (a) the consumer to whom such goods sold or delivered or agreed to be sold or delivered or any service provided or agreed to be provided may be filed with a District Forum by a) the consumers to whom such goods are sold or delivered or agreed to be sold or delivered or such service provided or agreed to be provided; b) any recognised consumer association whether the consumer to whom the goods sold or delivered or agreed to be sold or delivered or service provided or agreed to be provided is a member of such association or not; c) one or more consumers, where there are numerous consumers having the same interest, with the permission of the District Forum, on behalf of, or for the benefit of all, consumers so interested, or d) the Central or the State Government as the case may be, either in its individual capacity or a representative of interests of the consumers in general,
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2. Every complaint filed under sub section (1) shall be accompanied with such amount of fee and payable in such manner as may be prescribed. 3. On receipt of a complaint made under sub-section (1), the District Forum may, by order, allow the complaint to be proceeded with or rejected: Provided that a complaint shall not be rejected under this sub-section, unless an opportunity of being heard has been given to the complainant. Provided further that the admissibility of the complaint shall ordinarily be decided within twenty one days from the date on which the complaint was received. 4. Where a complaint is allowed to be proceeded with under sub-section (3) the District Forum may proceed with the complaint in the manner provided under this Act: Provided that where a complaint has been admitted by the District Forum, it shall not be transferred to any other court or tribunal or any authority set up by or under any other law for the time bring in force. Explanation- For the purposes of this section, recognised consumer association means any voluntary consumer association registered under the Companies Act, 1956 (1 of 1956) or any other law for the time being in force. Section 12 contains following three aspects: I. by whom complaint may be filed and S. 12(1) II. the manner in which complaint shall be made S. 12(2),(3) and (4), III. admissibility of a complaint. 2. Who can file Complaint? According to S. 12(1) the complaint under the Act can be filed by: (a) By Consumer: The consumer to whom such goods are sold or delivered or agreed to be sold or delivered or such service provided or agreed to be provided. It should be kept in mind that every person who is consumer may file complaint. So the buyer of goods or to who service has been provided and the persons who are beneficiaries of such or availing services are also included (see definitions of consumer). (b) Any Recognised consumer Association Any recognised consumer association whether the consumer to whom the goods sold or delivered or agreed to be sold or delivered or service provided or agreed to be provided is a member of such association or not. Association must be registered under the Indian Companies Act, 1956 or the Society Registration Act. There are 314 recognised Consumer Associations given in the Appendices. SEBI may also file complaint for the protection of the interest of the consumers. Can Attorney Holder File Complaint? In Punjab National Bank v. Ramakant Yadav, the State Commission, Patna held that holder of attorney cannot file complaint and he will not be considered complainant within the meaning of the Act.
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c) By One or More consumers The complaint may be filed by one or more consumers, where there are numerous consumers having the same interest, with the permission of the District Forum, on behalf of, or for the benefit of all, consumers so interested. d) Central or State Government The Central of State Government, as the case may be, either in its individual capacity or as a representation of interests of the consumers in general may be complainant or file complaint. 3. The manner of Filing complaints The object of the Act is to provide simple, speedy and cheaper measures for the protection of consumers. This has been insured under S. 12 of the Act S. 12 provide the manner in which the complaint shall be filed is very simple and easy. Here it is relevant to mention the judgment of the Supreme Court in L.D.A. v. M.K.Gandhi. The judgment of Supreme Court in this leading case was that the Consumer Protection Act is social welfare legislation and the purpose of this legislation is to prove a better, efficient and cheaper remedy to the consumers. So consumers must be kept free from the complicated judicial proceedings and the complicated obligations. Thus, the manner is quite informal and free from the shackles and trappings of the Civil Courts. Such manner is needed to be provided in the Rules, State Consumer Rules, 1987 does not provide but it has been provided in the Consumer Protection Rules, 1987. (Central) Rule 14 provides that a complaint containing the following particulars shall be presented by the complainant in person or by his agent to the National Commission or be sent by registered post, addressed to the National Commissiona) the name, description and the address of the complainant, b) the name, description and address of the opposite party or parties, as the case may be, so far as they can be ascertained c) the facts relating to the complaint and when and there it arose; d) documents in support of the allegations contained in the complaint, and e) the relief which the complaint claims. The same is the manner in case of filing of complaint before the state Commission or the District Forum. The complainant can file complaint before National Commission or State Commission or District Forum directly subject to pecuniary jurisdiction, i.e. above one crore to the National Commission, where it exceeds rupees twenty lakhs but does not exceed rupees one crore to the state Commission and up to Rupees twenty lakhs to the District Forum. There is no need of Advocate or any other pleader; however complainant may take the help of advocate.
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Fees. Sec. 12(2) Every complaint filed under sub-section (1) shall be accompanied with such amount of fee and payable in such manner as may be prescribed payment of fees was not required under original provisions of the Act. It has been provided by Amendment Act, 2002. There was India-based agitation against the imposition of fees. Keeping in view this wide-based agitation no rule has yet been made for imposing fee. In absence of prescribed rule the complaints are being filed without any fees. 4. Admissibility of the Complaint: S. 12(3) Sec. 12(3) has also been added by Amendment Act, 2002. On receipt of a complaint made as above, the District Forum may, by order, allow the complaint to be proceeded with or rejected. Thus, the District Forum may decide as to admissibility of the complaint. Provided that a complaint shall not be rejected under this sub-section unless an opportunity of being heard has been given to the complainant. It was noticed that a complaint has to litigate for a long time, some time for years before getting any redressal from a Consumer Fora. Many a time after long proceedings it was found that the remedy could not be provided under summary consumer jurisdiction and the parties were asked to seek remedy from Civil Court, of course by condoning the period spend in consumer proceedings for the purpose of limitation. This is the reason that new Section 12(3) of the Act provides for admission or rejection of the complaint by an order of the Fora. After a complaint is received, the Fora are required to decide the admissibility of the complaint within period of 21 days. This will leave minimum chances of being referred any matter to Civil Courts on the ground that it could not be decided under summary proceeding of the fora as the matter involves some complicated and complex issues. This is in the interest of consumers. Time Limit for Deciding Admissibility. S.12(3) The admissibility of a complaint must be decided within 21 days from the date on which the complaint was received. If the District Forum allows admissibility of a complaint it may proceed with the complaint in the manner provided under this act. [S.12 (4)]. No Transfer Provision of S. 12(4) Provision of sub-section 4 prohibits the transfer of the complaint to any other court or tribunal or any other authority set-up by or under any other law for the time being in force after a complaint has been admitted by the District Forum Under s. 12(3). 5. Procedure on Admission of Complaint (s. 13) When a complaint is filed subject to the provisions of S. 12 and its admissibility is accepted then the District Forum shall proceed with the complaint in accordance with the provisions of S. 13.
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Sec13. [Procedure on admission of complaint]1) The District Forum shall, [on admission of a complaint], if it relates to any goods (a) refer a copy of the admitted complaint, within twenty-one days from the date of its admission to the opposite party mentioned in the complaint directing him to give his version of the case within a period of thirty days or such extended period not exceeding fifteen days as may be granted by the District Forum]; b) where the opposite party on receipt of a complaint referred to him under clause (a) denies or disputes the allegations contained in the complaint, or omits or fails to take any action to represent his case within the time given by the District Forum, the District Forum shall proceed to settle the consumer dispute in the manner specified in clauses (c) to (g); c) where the complaint alleges a defect in the goods which cannot be determined without proper analysis or test of the goods, the District Forum shall obtain a sample of the goods from the complainant, seal it and authenticate it in the manner prescribed and refer the sample so sealed to the appropriate laboratory along with a direction that such laboratory make an analysis or test, whichever may be necessary, with a view to finding out whether such goods suffer from any defect alleged in the complaint or from any other defect and to report its findings thereon to the District Forum within a period of forty-five days of the receipt of the reference or within such extended period as may be granted by the District Forum; d) before any sample of the goods is referred to any appropriate laboratory under clause (c) the District Forum may require the complainant to deposit to the credit of the Forum such fees as may be specified, for payment to the appropriate laboratory for carrying out the necessary analysis or test in relation to the goods in question; e) the District Forum shall remit the amount deposited to its credit under clause (d) to the appropriate laboratory to enable it to carry out the analysis or test mentioned in clause (c) and on receipt of the report from the appropriate laboratory, the District Forum shall forward a copy of the report along with such remarks as the District Forum may feel appropriate to the opposite party; f) if any of the parties disputes the correctness of the findings of the appropriate laboratory, or disputes the correctness of the methods of analysis or test adopted by the appropriate laboratory, the District Forum shall require the opposite party or the complainant to submit in writing his objections in regard to the report made by the appropriate laboratory; and g) the District Forum shall thereafter give a reasonable opportunity to the complainant as well as the opposite party of being heard as to the correctness or otherwise of the report made by the appropriate laboratory and also as to the objection made in relation thereto under clause (f) and issue an appropriate order under section 14.
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(2) The District Forum shall, if the [Complaint admitted] by it under section 12 relates to goods in respect of which the procedure specified in subsection (1) cannot be followed, or if the complaint relates to any services a) refer a copy of such complaint to the opposite party directing him to give his version of the case within a period of thirty days or such extended period not exceeding fifteen days as may be granted by the District Forum; b) where the opposite party, on receipt of a copy of the complaint referred to him under clause (a) denies or disputes the allegations contained in the complaint, or omits or fails to take any action to represent his case within the time given by the District Forum, the District Forum shall proceed to settle consumer dispute i) on the basis of evidence brought to its notice by the complainant and the opposite party, where the opposite party denies or disputes the allegations contained in the complaint, or ii) exparty on the basis of evidence brought to its notice by the complaint where the opposite party omits or fails to take any action to represent his case within the time given by the Forum; (c) where the complainant fails to appear to appear on the date of hearing before the District Forum, the District Forum may either dismiss the complaint for default or decide it on merits. (3) No proceedings complying with the procedure laid down in sub-sections (1) and (2) shall be called in question in any court on the ground that the principles of natural justice have not been complied with. (3A) Every complaint shall be heard as expeditiously as possible and endeavor shall be made to decide the complaint within a period of three months from the date of receipt of notice by opposite party where the complaint does not require analysis or testing of commodities and within five months if it requires analysis or testing of commodities. Provided that no adjournment shall be ordinarily granted by the District Forum unless sufficient cause is shown and the reasons for grant of adjournment have been recorded in writing by the Forum: Provided further that the District Forum shall make such orders as to the costs occasioned as may be provided in the regulations made under this Act. Provided also that in the event of a complaint being disposed of after the period so specified this District Forum shall record in writing, the reasons for the same at the time of disposing of the said complaint. (3B) where during the pendency of any proceeding before the District Forum, it appears to it necessary, it may pass such interim order as is just and proper in the facts and circumstances of the case (4) For the purposes of this section, the District Forum shall have the same powers as are vested in a civil court under Code of Civil Procedure, 1908 (5 of 1908) while trying a suit in respect of the following matters, namely 374
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i)
the summoning and enforcing the attendance of any defendant or witness and examining the witness on oath,
ii) the discovery and production of any document or other material object producible as evidence, iii) the reception of evidence on affidavits, iv) the requisitioning of the report of the concerned analysis or test from the appropriate laboratory or from any other relevant source. Have you under stood ? Objective questions : 1. Complaint should be in _________________________form a. oral b. written c. oral (or) written d. none of these 2. The st anding working group shall consists of not exceeding__________members a. 20 b. 40 c. 30 d. 25 3. The consumer courts have been established at three levels one is District forum, second is state commission and third is _______________ a. consumer self group b. joint action committ ee c. national commission d. tribunal 4. The qualification of a member of a district forum is__________ a. not less than 50 years b. not less than 45 years c. not less than 60 years d. not less than 30 years 5. The time limit for the admissibility of the petition by the district forum is________ a. 25 days Answers 1. b 2. c 3. c 4. d 5. c II- Short Answer Questions : 6. Trace the history and growth of the Consumer Protection Act. 7. Who is a consumer? 8. Who is a Complainant? 9. Define Goods and services. 10. What is deficiency in services? III- Long Answer Questions : 11. Describe the constitution of consumer protection council. 12. Explain the process of complaint to redressal. 13. Discuss the factors considered for the decision on jurisdiction of consumers courts.
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b. 30 days
c. 21 days
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5.2
Summary The Consumer Protection Act, 1986 is one of the benevolent social legislation intended to protect the large body of consumers from exploitation. The Act has come as a panacea for consumers all over the country and has assumed the shape of practically the most important legislation enacted in the country during the last few years. It has become the vehicle for enabling people to secure speedy and inexpensive redressal of their grievances. With the enactment of the law, consumers now feel that they are in a position to declare sellers be aware whereas previously the consumers were at the receiving end and generally told buyers be aware. The Act postulates establishment of Central Consumer Protection Council and the State Consumer Protection Councils for the purpose of spreading consumer awareneSecs. Central Council is headed by Minister in-charge of the Consumer Affairs in the Central Government and in the State it is the Minister in-charge of the Consumer Affairs. Introduction of Cyber Laws New communication systems and digital technology have made dramatic changes in the way we live and the means to transact our daily busineSecs. There is a remarkable change in the way people transact busineSecs. Businessmen are increasingly using computers to create, transmit and store and retrieve and speedier to communicate. Although people are aware of the advantages which the electronic form of business provides, people are reluctant to conduct business or conclude and transaction in the electronic from due to lack of appropriate legal framework. Electronic commerce eliminates need for paper based transactions. The two principal hurdles which stand in the way of facilitating electronic commerce and electronic governance, are the requirements of writing and signature for legal recognition. At present many legal provisions assume the existence of paper based records and documents which should bear signatures. The law of evidence is traditionally based upon paper based records and oral testimony. Hence to facilitate-commerce, the need for legal changes has become an urgent necessity. The government of India realized the need for introducing a new law and for making suitable amendments to the existing laws to facilitate ecommerce and give legal recognition to electronic records and digital signatures in turn will facilitate the conclusion of contracts and the creation of legal rights and obligations through the electronic communication like Internet. This gave birth to the Information Technology Bill, 1999. In May 2000, both the houses of the Indian Parliament passed the Information Technology Bill. The Bill received the assent of the President in August 2000 and came to be known as the Information Technology Act, 2000. Cyber Law is contained in the IT, Act, 2000. This Act aims to provide the legal infrastructure for e-commerce in India and would have a major impact for e-businesses and the new economy in India. Therefore, it is important to understand what are the various perspectives of the IT Act, 2000 and when it offers.
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The Information Technology Act, 2000 also aims to provide the legal framework under which legal sanctity is accorded to all electronic records and other activities carried out by electronic means. The Act states that unless otherwise agreed, an acceptance of contract may be expressed by electronic means of communication and the same shall have legal validity and enforceability. Information technology act, 2000 Arrangement of Sections: The Act consists of 94 sections spread over thirteen chapters, and four schedules to the Act, The various chapters are discussed in detail later. The Schedules to the Act contain related amendments made in other acts as outlined in the objectives of the Act, namely, the Indian Penal Code, the Indian Evidence Act, 1972, the Bankers Book Evidence Act, 1891 and the Reserve Bank of India, 1934. 5.2.1 Learning Objectives : After studying this unit you should be able to:

Understand about the objectives of the Information technology Act Know about the formalities of electronic records authentication. Determine the need and scope the Electronic commerce. Know what is Electronic signatures and its procedures of recognition. Understand the functions of Cyber regulations Appellate Tribunal Specify the role of Cyber regulations advisory committee.
5.2.2 Objectives of Information Technology Act, 2000 The objectives of the Act are:
to grant legal recognition for transactions carried out by means of electronic date interchange and other means of electronic communication commonly referred to as electronic commerce in place of paper based methods communications; to give legal recognition to digital signature for authentication of any information or matter which requires authentication under any law; to facilitate filing of documents with government departments; to facilitate electronic storage of date; to facilitate and give legal sanction of electronic fund transfers between banks and financial institutions; to give legal recognition for keeping books of account by bankers in electronic form. Evidence Act, 1891 and the Reserve Bank of India Act, 1934.
Scope of the Act. The Act extends to the whole of India and unless otherwise provided in the Act, it applies also to any offence or contravention there under
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committed outside India by any person. The Act shall not apply to the following:
a negotiable instrument as defied in Section 13 of Negotiable Instruments Act, 1881 a power of Attorney as defined in Section 1A of the Powers-ofa trust as defined in Section 3 of the Indian Trusts Act, 1882; a will as defined in of section 2 of Indian Succession Act, 1925 including any other testamentary disposition by whatever name called; any contract for the sale or conveyance of immovable property or any interest in such property; any such class of documents or transactions as may be notified by the Central Government in the Official Gazette.
5.2.3 Definitions (Section 2) (a) Access with its grammatical variations and cognate expressions means gaining entry into, instructing or communicating with the logical, arithmetical, or memory function resources of a computer, computer system or computer network; (b) Addressee means a person who is intended by the originator to receive the electronic record but does not include any intermediary; (c) Affixing digital signature with its grammatical variations and cognate expressions means adoption of any methodology or procedure by a person for the purpose of authenticating an electronic record by means of digital signature; (d) Appropriate Government means the Central Government except in the following two cases where it means the State Government; (i) in matter enumerated in List II of the Seventh Schedule to the Constitution; (ii) relating to any state law enacted under List III of the Seventh Schedule to the Constitution; (e) Asymmetric crypto system means a system of a secure key pair consisting of a private key for creating a digital signature and a public key to verify the digital signature; (f) Computer means any electronic magnetic, optical or other high-speed date processing device or system which performs logical, arithmetic and memory functions by manipulations of electronic, magnetic or optical impulses, and includes all input output, processing, storage, computer software, or communication facilities which are connected or related to the computer in a computer system or computer network; (g) Computer network means the interconnection of one or more computers through - (i) the use of satellite, microwave, terrestrial line or other communication media; and (ii) terminals or a complex consisting of two or more interconnected computers whether or not the interconnection is continuously maintained;
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(h) Computer resource means computer system, computer network, data, computer data base or software; (i) Computer system means device or collection of devices, including input and output support devices and excluding calculators which are not programmable and capable of being used in conjunction with external files, which contain computer programmes, electronic instructions, input data and output data, that performs logic, arithmetic, data storage and retrieval, communication control and other functions. (j) Data means a representation of information, knowledge, facts, concepts or instructions which are being prepared or have been prepared in a formalized manner, and is intended to be processed, is being processed or has been processed in a computer system or computer network, and may be in any form (including computer printouts magnetic or optical storage media, punched tapes or stored internally in the memory of the computer. (k) Digital signature means authentication of any electronic record by a subscriber by means of an electronic method or procedure in accordance with the provisions of Section 3. (l) Electronic form with reference to information means of any information generated, sent, received or stored in media, magnetic, optical, computer memory, micro film, computer generated micro fiche or similar device ; (m) Electronic record means data, record or date generated, image or sound stored, received or sent in an electronic form or micro film or computer generated micro fiche; (n) Function in relation to a computer, includes logic, control arithmetical process, deletion, storage and retrieval and communication or telecommunication from or within a computer; (o) Information includes data, text, images, sound, voice, codes, computer programmes, software and database or micro film or computer generated micro fiche. (p) Intermediary with respect to any particular electro message means any person who on behalf of another person receives stores or transmits that message or provides any service with respect to that message; (q) Key pair in an asymmetric crypto system, means a private key and its mathematically related public key, which are so related that the public key can verify a digital signature created by the private key; (r) Originator means a person who sends, generates, stores or transmits any electronic message or causes any electronic message to be sent, generated, stored or transmitted to any other person but does not include an intermediary; (s) Prescribed means prescribed by rules made under this Act; (t) Private key means the key of a key pair used to verify a digital signature and listed in the Digital Signature Certificate;
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(u) Secure system means computer hardware, software, and procedure that (a) are reasonably secure from unauthorised access and misuse; (b) provide a reasonable level of reliability and correct operation; (c) are reasonably suited to performing the intended functions; and (d) adhere to generally accepted security procedures; (v) verify in relation to a digital signature, electronic record or public key, with its grammatical variations and cognate expressions means to determine whether (a) the initial electronic record was affixed with the digital signature by the use of private key corresponding to the public key of the subscriber; (b) the initial electronic record is retained intact or has been altered since such electronic record was so affixed with the digital signature. 5.2.4 Authentication of Electronic Records (Section 3) The section provides the conditions subject to which an electronic record may be authenticated by means of affixing digital signature. The digital signature is created in two distinct steps, first the electronic record is converted in to a message digest by using a mathematical function known as hash function which digitally freezes the electronic record thus ensuring the integrity of the content of the intended communication contained in the electronic record. Any tampering with the contents of the electronic record will immediately invalidate the digital signature. Secondly, the identity of the person affixing the digital signature is authenticated through the use of a private key which attaches itself to the message digest and which can be verified by anybody who has the public key corresponding to such private key. This will enable anybody to verify whether the electronic record is retained intact or has been tampered with since it was so fixed with the digital signature. It will also enable a person who has a public key to identify the originator of the message. For the purpose of this sub-section, hash function means an algorithm, mapping or translation of one sequence of bits into another generally smaller, set known as `hash result` such that an electronic record yields the same hash result every time the algorithm is executed with the same electronic record as its input making it computationally infeasible a. to derive of reconstruct the original electronic record from the hash result produced by the algorithm; b. that two electronic record can be produced the same hash result using the algorithm. 5.2.5 Electronic Governance (Sections 4-10) Section 4 - This section provides for legal recognition of electronic records. It provides that where any law requires that any information or matter should be in the typewritten or printed form then such requirement shall be deemed to be satisfied it if it in electronic form.
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Section 5 - This section provides for legal recognition of Digital signature. Where any law requires that any information or matter should be authenticated by affixing the signature of any person, then such requirement shall be satisfied if it is authenticated by means of Digital signatures affixed in such manner as may be prescribed by the Central Government. For the purposes this section signed with its grammatical variations and cognate expressions, shall with reference to a person, mean affixing of his hand written signature or any mark or any document and the expression `signature` shall be construed accordingly. Section 6 - lays down the foundation of Electronic Governance. It provides that the filing of any form, application or other documents, creation, retention or preservation of records, issue or grant of any license or permit or receipt or payment in government offices and its agencies may be done through the means of electronic form. The appropriate Government has the power to prescribe the manner and format of the electronic records and the method of payment of fee in that connection. Section 7 - This Section provides that the documents, records or information which to be retained for any has specified period shall be deemed to have been retained if the same is retained in the electronic form provided the following conditions are satisfied: i. ii. the information therein remains accessible so as to be usable subsequently. the electronic record is retained in its original format or in a format which accurately represents the information contained.
iii. the details which will facilitate the identification of the origin, destination, dates and time of despatch of receipt of such electronic record are available therein. This section does not apply to any information which is automatically generated solely for the purpose of enabling an electronic record to be dispatched or received. Moreover, this section does not apply to any law that expressly provides for the retention of documents, records or information in the form of electronic records. Section 8 - provides for the publication of rules, regulations and notifications in the Electronic Gazette. It provides that where any law requires the publication of any rule, regulation, order, bye-law, notification or any other matter in the Official Gazette, then such requirement shall be deemed to be satisfied if the same is published in an electronic form. It also provides where of Official Gazette is published both in the printed as well as in electronic form, the date of publication shall be date of publication of the Official Gazette which was first published in any form. However, Section 9 of the Act provides that the conditions stipulated in Sections 6, 7 and 8 shall not confer any right to insist that the document should be accepted in an electronic form by any Ministry or department of the Central Government or the State Government.
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Power to Central Government to make rules (Section 10): This section provides that the Central Government, in respect of Digital Signature may prescribe by rules the following: a. the type of digital signature b. the manner and format in which the digital signature shall be affixed c. the manner or procedure which facilitates identification of the person affixing the digital signature. d. control processes and procedures to ensure adequate integrity, security and confidentiality of electronic records or payments and e. any other matter which is necessary to give legal effect to digital signatures. 5.2.6. Attribution, Receipt and Dispatch of Electronic records (Sections 11 - 13) Section 11 Deals with attribution, receipt and dispatch of electronic records Attribution with regard to a certain means to consider it to be written or made by someone. Hence, this section lays down how an electronic record is to be attributed to the person who originated it. Section 12 provides for the manner in which acknowledgement of receipt of an electronic record by various modes shall be made. Section 13 provides for the manner in which the time and place of despatch and receipt of electronic record sent by the originator shall be identified. It is provided that in general, an electronic record is deemed to be despatched at the place where the originator has his pace of business and received where the addressee has his place of busineSecs. For the purpose of this Section a. if the originator or the addressee has more than one place of business, the principal place of business shall be the place of busineSecs. b. if the originator or the addressee does not have a place of business, his usual place of residence shall be deemed to the place of business; c. usual place of residence in relation to a body corporate, means the place where it is registered. Secure Electronic Records and Secure Digital Signatures (Section 14 - 16) The I.T. Act sets out the conditions that would apply to qualify electronic records and digital signatures as being secure. It contains sections 14 to 16. Section 15 provides for the security procedure to be applied to Digital Signatures for being treated as a secure digital signature. Section 16 provides for the power of Central Government to prescribe the security procedure in respect of secure electronic records and secure digital signatures. In doing so, the Central Government shall take into
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account various factors like nature of the transaction, level of sophistication of the technological capacity of the parties, availability and cost of alternative procedures, volume of similar transactions entered into by other parties, etc. 5.2.7 Regulation of Certifying Authorities (Sections 17 - 34) The I.T.Act contains detailed provisions relating to the appointment and powers of the controller and certifying Authorities. It contains sections 17 to 34. Section 17 Provides for the appointment of controller and other officers to regulate the Certifying Authorities. Section 18 lays down the functions which the controller may perform in respect of activities of Certifying Authorities. Section 19 provides for the power of the Controller with previous approval of the Central Government to grant recognition to foreign certifying Authorities subject to such conditions and restrictions as may be imposed regulations. Section 20 This section proves that the controller shall be acting as repository of all digital signature Certificates issued under the Act. He shall also adhere to certain security procedure to ensure secrecy and privacy of the digital signatures and also to satisfy such other standards as may be prescribed by the Central Government. He shall maintain a computerized database of all public keys in such a manner that they are available to the general public. Section 21 This section provides that a license to be issued to a certifying Authority to issue Digital Signature Certificates by the controller shall be in such from and shall be in such form and shall be accompanied with such fees and other documents after considering the application may either grant the license or reject the application after giving reasonable opportunity of being heard. Section 22 This section provides that the application for license shall be accompanied by a certification practice statement and statement including the procedure with respect to identification of the applicant. It shall be further accompanied by a fee not exceeding Rs.25, 000 and other documents as may be prescribed by the Central Government. Section 23 provides that the application for renewal of a license shall be in such form and accompanied by such fees not exceeding Rs.5,000 which may be prescribed by the Central Government. Section 24 deals with the procedure for grant or rejection of license by the controller on certain grounds. However, that no application shall be rejected under this section, unless the applicant has been given a reasonable opportunity of presenting his case. Section 25 provides that the controller may revoke a license on grounds such as incorrect or false material particulars being mentioned in the
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application and also on the ground of contravention of any provisions of the Act, rule, regulation or order made there under. However, no license shall be revoked unless the Certifying Authority has been given a reasonable opportunity of showing cause against the proposed revocation. Also, no license shall be suspended for a period exceeding ten days unless the Certifying. Authority has been given a reasonable opportunity of showing cause against the proposed suspension. Thereafter, the controller shall publish a notice of suspension or revocation, as the case may be, shall be made available through a web site which shall be accessible round the clock. It also provided that the controller may, if he considers necessary, publicize the contents of database in such electronic or other media, as he may consider appropriate. Controllers power to delegate: Under Section 27 controller may in writing authorize the Deputy Controller, Assistant controller or any officer to exercise any of his powers under the Act. Other powers: The controller shall have power to investigate contravention of the provisions of the Act or rules or regulations made there under either by himself or through any officer authorized in this behalf. The controller or any person authorized by him, shall have access to any computer system, data or any other material connected with such system if he has reasonable cause to suspect that contravention of the provision of the Act or the rules or regulation is being committed. Duties of Certifying Authorities (Section 30) 1. This section provides that every Certifying Authority shall follow certain procedures in respect of digital signature as given below: a. make use of hardware, and procedures that a secure from intrusion and misuse; b. provide a reasonable level of reliability in its services which are reasonably suited to the performance of intended functions; c. adhere to security procedures to ensure that the secrecy and privacy of the digital signatures are assured; d. observe such other standards as may be specified by regulations; 2. Every Certifying Authority shall also ensure that every person employed by him complies with provisions of the Act, or rules, regulations or orders made there under; 3. A Certifying Authority must display its license at a conspicuous place of the premises in which it carries on its business and a Certifying Authority whose license is suspended or revoked shall immediately surrender the license to the Controller; 4. Section 34 further provides that every Certifying Authority shall disclose its digital signature certificate which contains the public key corresponding to the private key used by that Certifying Authority and other relevant facts.
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5.2.8 Digital signature certification (Section 35 - 39) Section 35 lays down the procedure for issuance of a digital signature Certificate. It provides that an application for such certificate shall be made in the prescribed form and shall be prescribed by the Central Government, and different fees may be prescribed for different classes of applicants. The section also provides that no Digital Signature Certificate shall be granted unless the Certifying Authority is satisfied that a. the applicant holds the private key corresponding to the public key to be listed in the Digital signature Certificate; b. the applicant holds a private key, which is capable of creating a digital signature; c. the public key to be listed in the certificate can be used to verify a digital signature affixed by the private key held by the applicant. However, no application shall be rejected unless the applicant has been given a reasonable opportunity of showing cause against the proposed rejection. While issuing a Digital Signature Certificate the Certifying Authority should certify that it has complied with provisions of the Act, the rules and regulations made there under and also with other conditions mentioned in the Digital Signature Certificate. Suspension of the Digital Signature Certificate The certifying Authority may suspend such certificate it if is of the opinion that such a step needs to be taken in public interest. Such certificate shall not be suspended for a period exceeding 15 days unless the subscriber has been given an opportunity of being heard. Section 38 provides for the revocation of Digital Signature Certificates under certain circumstances. Such revocation shall not be done unless the subscriber has been given an opportunity of being heard in the matter. Upon revocation or suspension. The Certifying Authority shall publish the notice of suspension of a Digital Signature Certificate 5.2.9 Duties of subscribers (Section 40 - 42) 1. On acceptance of the Digital Signature Certificate the subscriber shall generate a key paid using a secure system. A subscriber shall be deemed to have accepted a Digital Signature Certificate if he publishes or authorities the publication of such signature to one more persons or otherwise demonstrates his approval of the Digital Signature Certificate. By so accepting the certificate, the subscriber certifies to the public the following. a. that he holds the private key corresponding to the public key listed in the Digital Signature Certificate; and b. that all the information contained in the certificate as well as material relevant to them are true.
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2. The subscriber shall exercise all reasonable care to retain control of his private key corresponding to the public key. If such private key has been compromised (i.e. endangered or exposed), the subscriber must immediately communicate the fact to the Certifying Authority. Otherwise, the subscriber shall be liable till he has informed the Certifying Authority that the private key has been compromised. 5.2.10 Penalties and Adjudication (Sections 43 - 47) The Act provides for awarding compensation or damages for certain types of computer frauds. It also provides for the appointment of Adjudicating Officer for holding an inquiry in relation to certain computer crimes and for awarding compensation. Types of penalties Penalty for damage to computer, computer system or network: Section 43 deals with penalty for damage to computer, computer system, etc. by any of the following methods: a. securing access to the computer, computer system or computer network; b. downloading or extracting any data, computer database of information from such computer system or those stored in any removable storage medium; c. introducing any computer contaminant or computer virus into any computer system or network; d. damaging any computer, computer system or network or any computer data database or programme; e. disrupting any computer, computer system or network; f. denying access to any person authorised to access any computer, computer system or networ;
g. providing assistance to any person to access any computer, computer system or network in contravention of any person by tampering with or manipulating any computer, computer system or network; h. Explanation - For the purposes of this section, i. computer contaminant means any set of computer instructions that are designed a. to modify, destroy, record, transmit data or programme residing within a computer, computer system or computer network; or b. by any means to usurp the normal operation of the computer, computer system, or computer network; ii. computer database means a representation of information, knowledge, facts, concepts or instructions in text, image, audio, video that are being prepared or have been prepared in a formalized manner or have been produced by a computer, computer system or computer network and are intended for use in a computer, computer network; iii. computer virus means any computer instruction, information, data or
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programme that destroys, damages, degrades or adversely affects the performance of a computer resource or attaches itself to another computer resource and operates when a programme, data or instruction is executed or some other even takes place in that computer resource; iv. damage means to destroy, alter, delete, add, modify or rearrange any computer resource by any means. Section 46 confers the power of adjudicate contravention under the Act to an officer not below than the rank of a Director to the Government of India or an equivalent officer of a State Government. Such appointment shall be made by the Central Government. In order to be eligible for appointment as an adjudicating officer, a person must possess adequate experience in the field of Information Technology and such legal or judicial experience as may be prescribed by the Central Government. The adjudicating officer so appointed shall be responsible for holding an inquiry in the prescribed manner after giving reasonable opportunity of being heard and thereafter, imposing penalty where required. Section 47 provides that while deciding upon the quantum of compensation, the adjudicating officer shall have due regard to the amount of gain of unfair advantage and the amount of loss caused to any person as well as the respective nature of the default. 5.2.11 Cyber regulations appellate tribunal The Cyber Regulations Appellate Tribunal have appellate powers in respect of orders passed by any adjudicating officer. Civil courts have been barred from entertaining any suit or proceedings in respect of any matter which an adjudicating officer to Tribunal is empowered to handle. Section 48 provides for establishment of one or more appellate Tribunals to be known as Cyber Regulations Appellate Tribunals. It shall consist of one person only (called the Presiding Officer of the Tribunal) who shall be appointed by notification by the Central Government. Such a person must be qualified to be a judge of a High Court or is or has been a member of the Indian Legal Service in the post in Grade I of that service for at least there years. The Presiding Officer shall hold office for a term of five years or up to a maximum age limit of 65 years, whichever is earlier. Section 52 provides for the salary and allowances and other terms and conditions of service of the presiding officer. Section 53 provides that in the situation of any vacancy occurring in the office of the Presiding Officer of Cyber Regulations Tribunal. The Central Government shall appoint another person in accordance with the provisions of this Act. Resignation and removal of the Presiding Officer (Section 54) The Presiding officer shall, unless he is permitted by the Central Government to relinquish his office sooner, continue to hold office until the expiry of three months from the date of receipt of such notice or until a person duly appointed as his successor enters upon his office or until the expiry of his term of office, whichever is the earliest.
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No order appointing any presiding officers shall be called in question merely on the ground of any defect in the Constitution of the Tribunal. The Central Government shall provide such officer for the functioning of the Cyber Regulations Appellate Tribunal. It empowers the Central Government to frame rules relating to salaries, allowances and other conditions of service of such officers and employees. Appeal to Cyber Regulations Appellate Tribunal An appeal may be made by an aggrieved person against an order made by an adjudicating officer to the Cyber Appellate Tribunal. The appeal must be within forty five days from the date on which the order is received. The Cyber Appellate Tribunal may entertain an appeal after the expiry of the said period of forty five days if it is satisfied that there was sufficient cause for not filing it within that period. However, no appeal shall be entertained if the original order was passed with the consent of both parties. The Tribunal after giving both the parties an opportunity of being heard shall pass the order as it thinks fit. Powers and procedure of the Appellate Tribunal Section 58 provides for the procedure and powers of the Cyber Appellate Tribunal. The Tribunal shall also have the powers of the Civil Court under the Code of Civil Procedure 1908. Some of the powers specified are in respect of the following matters. a. summoning and enforcing the attendance of any person and examining him on oath; b. requiring production of documents and other electronic records; c. receiving evidence on affidavits; d. reviewing its decisions; e. issuing commissions for examination of witness, etc. The appellant may either appear in person or may be represented by a legal practitioner to present his case before the Tribunal. Section 60 provides for period of limitation for admission of appeals from the aggrieved persons to the Cyber Appellate Tribunal Section 61 provides that no court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which an adjudicating officer has jurisdiction to determine. Appeal to High Court (Section 62) This section provides for an appeal to the High Court by an aggrieved person from the decision of the Cyber Appellate Tribunal. The appeal shall be made within sixty days from the date on which the tribunals decision is communicated. The appeal shall be on any question of law or fact arising out of the order. Compounding of contravention Section 63 This section provides that any contravention under the Act may be compounded by the controller or adjudication officer, either before
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or after the institution of the adjudication proceedings subject to such conditions as he may impose. It is also provided that such sum shall not, in any case, exceed the maximum amount of the penalty which may be imposed under this Act for the contravention so compounded. However, these provisions shall not apply to a person who commits the same or similar contravention within a period of three years from the date on which the first contravention, committed by him, was compounded. Recovery of Penalty Section 64 provides for recovery of penalty as arrears of land revenue and for suspension of the license or Digital Signature Certificate till the penalty is paid. 5.2.12 Offences Tampering with computer source documents (Section 65): This section provides for punishment with imprisonment up to three years or with a fine which may extend to Rs. 2 lakhs or with imprisonment up to 3 years, or with both. Hacking with computer system (Section 66) : Hacking is a term used to describe the act of destroying or deleting or altering any information residing in a computer resource or diminishing its value or utility, or affecting it injuriously in spite of knowing that such action is likely to cause wrongful loss or damage to the public or that person. Section 66 provides that a person who commits hacking shall be punished with a fine upto Rs. 2 lakhs or with imprisonment upto 3 years, or with both. Publishing of information which is obscene in electronic form: Section 67 provides for punishment to whoever transmits or publishes or causes to be published or transmitted, any material which is obscene in electronic form with imprisonment for a term which may extended to five years and with fine which may extended to five years and with fine which may extended to Rs.1 lakh on first conviction. In the event of second or subsequent conviction the imprisonment would be for a term which may extend to ten years and fine which may extend to Rs.2 lakhs. Power of the Controller 1. Section 68 provides the controller may give directions to certifying authority or an employee of such authority to take such measures or cease carrying on such activities as specified in the order, so as to ensure compliance with this law. If any person fails to comply, he shall be liable to imprisonment upto 3 years or five upto Rs. 2 lakhs, or both. 2. Section 69 empowers the controller, if he is satisfied that it is necessary or expedient so to do in the interest of sovereignty and integrity of India. Security of the state, friendly relation with foreign states or public order, to intercept any information transmitted through any computer system or computer network. 3. Section 70 empowers the appropriate Government to declare by notification any computer, computer system or computer network to be
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protected system. Any unauthorized access of such systems will be punishable with imprisonment which may extend to ten years or with fine. Penalty for Misrepresentation (Section 71) This Section provides that any person found misrepresenting or suppressing any material fact from the controller or the certifying authority shall be punished with imprisonment for a term which may extend to two years or with fine which may extend Rs. 1 lakh or with both. Penalty for publishing False Digital signature certificate Section 73 This section provides punishment for publishing a Digital Signature certificate false in material particulars or otherwise making it available to any person with imprisonment for a term which may extend to two years or with find which may extend to Rs. 1 lakh or with both. Penalty for Fraudulent Publication (Section 74) This Section provides for punishment with imprisonment for a term which may extend to two years or with fine which may extend to Rs. 1 lakh or with both to a person whoever knowingly publishes for fraudulent purpose any Digital Signature certificate. Act Apply for Offence Committed Outside India Section 75 provides for punishment for commission of any offence or contravention by a person outside India irrespective of his nationality if the act of conduct constituting the offence or contravention involves a computer, computer system or computer network located in India. Confiscation (Section 76) This Section provides for confiscation of any computer, computer system, floppies, compact disks, tape drives or any other accessories related thereto in respect of contravention of any provision the Act, rules, regulations or orders made there under. It is also provided that where it is established to the satisfaction of the court adjudicating of the confiscation that the person in whose possession, power or control of any such computer, computer system, floppies, compact disks, tape drives or any other accessories relating thereto is found is not responsible for the contravention of the provisions of this Act, rule, orders or regulations made there under, the court may instead of making an order for confiscation of such computer, computer system, floppies, compact disks, tape drives or any other accessories related thereto, make such other order authorised by this Act against the person contravening the provisions of this Act, orders or regulations made there under as it may think fit. Section 77 further provides that penalty and confiscation provided under this act shall not interfere with other punishment provided under any other law for the time being in force.
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Section 78 provides for power to investigate the officers under the Act by a police officer not below the rant of Deputy Superintendent of Police. Network service providers not to be liable in certain cases Section 79 provides that the Network Service Providers shall be liable for any third party information or data made available by him if he proves that the offence was committed without his knowledge or consent. Explanation - For the purpose of this selection a. network service provider means an intermediary; b. third party information means any information dealt with by a network service provider in his capacity as an intermediary. 5.2.13 Power of Government Section 87 of the Act confers on the Central Government the power to make rules by notifying in the Official Gazette and the electronic gazette, in respect of certain matter, some of which are: the manner in which any matter may be authenticated by a Digital signature; the manner and format in which electronic records shall be filed or issued; the type of Digital signature, manner and format in which it may be affixed; the security procedure for the purpose of creating same electronic record and secure Digital signature; the qualifications, experience and terms and conditions of service of controller , Deputy controllers and Assistant controllers; the requirements, manner and form in which application is to be made for license to issue Digital Signature Certificate; the period of validity of the license the qualifications, experience of an adjudicating officer, as well as other officers; the salary, allowances and terms and conditions of service of the Presiding Officer, etc. Every notification made by the Central Government shall be laid, as soon as possible after it is made, before each House of Parliament, while it is in session, for a total period of thirty days. This period maybe comprised in one session or in two or more successive sessions. If before the expiry of the session immediately following the above period, both Houses agree in making any modification, the rule will thereafter have effect only in the modified form. Similarly if both Houses agree that the rule should not be made, the notification shall have no effect, thereafter. Power of the State Government to make Rules The State Government may be notification in the Official Gazette, make rules to carry out the provisions of this Act, Such rules may provide for all or any of the following matters: The electronic form in which filing, issue, grant receipt or payment shall be effected in respect of use of electronic records and Digital signatures in Government and its agencies.
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The manner and format in which such electronic records shall be filed or issued and the fee of charges in connection of the same. Any other matter required to be provided by rules by the State Government. Every such rule shall be laid before each House of the State Legislature.
5.2.14Cyber Regulations Advisory Committee The Cyber Regulations Advisory Committee shall be constituted by the Central Government. It shall consist of a chair person and such member of official and non-official members as the Central Government shall deem fit. Such members shall have special knowledge of the subject matter or the interest principally affected. The committee shall advise the Central Government on any rules or any other purpose connected with the Act, and the controller in framing regulations under this Act. Power of Controller to Make Regulations The controller has been given powers under Section 89 to make regulations consistent with the Act and the related rules so as carry out the purpose of this act. However, he may do so after consultation with the Cyber Regulations Advisory Committee and with the previous approval of the Central Government on any rules or any other purpose connected with the Act, and the Controller in framing regulations under this Act.
the particulars relating to maintenance subject to which the controller may recognise any of every Certifying Authority the conditions and restrictions subject to which the controller may recognise any foreign Certifying Authority; the terms and conditions subject to which a licence may be granted;
other standard to be observed by a Certifying Authority; the manner in which the Certifying Authority may make the disclosure under Section 34; the particulars of statement to be submitted along with an application for the issue of a Digital Signature Certificate; the manner in which the subscriber should communicate the compromise of private key to the Certifying Authority. The procedure for passing the resolution is the same as given in section 87 in respect of notifying rules by the Central Government. Power of police Officer and Other Officers to Enter, search, etc. Section 80 provides that notwithstanding anything contained in the code of Criminal Procedure, 1973, any police officer, not below the rank of a Deputy Superintendent of Police, or any other officer of the Central or State Government, if so authorised by the Central Government, may either any public place and search and arrest without warrant any person found therein who is reasonably suspected of having committed or of committing or is about to commit any offence under this Act. For this, purpose, public place would include a public conveyance, any hotel, any shop or any other place accessible to the public.
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The section further provides that where any person is arrested by an officer other than a police officer, such officer shall immediately send the arrested person to a magistrate having jurisdiction or to the officer in charge of a police station. Liability of Companies (Section 85) Where a company commits any offence under this Act or any rule there under, every person who, at the time of the contravention, was in change of and was responsible for the conduct of the business of the company shall be guilty of the contravention. However, he shall not be liable to punishment if he proves that the contravention took place without his knowledge or that he exercised all due diligence to prevent the contravention. Further, Where a contravention has been committed by a company, and it is proved that the contravention took place with the connivance or consent of or due to any negligence on the part of any director, manager, secretary or other officer of the company, such officer shall be deemed to be guilty and shall be liable to be proceeded against and punished accordingly. For the purpose of this section, company includes a firm or other association of persons and director in relation to a firm means a partner in the firm. An appraisal of the I.T.Act 2000 The Information Technology Act will go a long way in facilitating and regulating electronic commerce. It has provided a legal framework for smooth conduct of e-commerce. It has tackled the following legal issues associated with-commerce. a. requirement of writing. b. requirement of a document. c. requirement of a signature and d. requirement of legal recognition for electronic messages, records and documents to be admitted in evidence in a court of law. However the Act, has not addressed the following grey areas: i) protection for domain names ii) infringement of copyright laws iii) jurisdiction aspect of electronic contracts (viz. Jurisdiction of Courts and tax authorities) (iv) taxation of goods and services trades through ecommerce and (v) stamp duty aspect of electronic contracts. The Central Government introduced in the winter session of the Parliament a Bill styled Digital Copy Right Bill 2000 with a view to protecting the copyright of subscribers who have obtained Digital Signature Certificate from the certifying authorities. Changes made in other Acts Section 91 to 94 of the Information Technology Act, 2000 relate to various amendments effected in other Acts as detailed below: 91. Amendment of Act 45 of 1860 The Indian Penal Code shall be amended in the manner specified in the First Schedule to this Act.
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92. Amendment of Act 1 of 1872 The Indian Evidence Act, 1872 shall be amended in the manner specified in the Second Schedule to this Act. 93. Amendment of Act 18 of 1891 The Bankers book Evidence Act, 1891 shall be amended in the manner specified in the Third Schedule to this Act. 94. Amendment of Act 2 of 1934 The Reserve Bank of India, 1934 shall be amended in the manner specified in the Fourth Schedule to this Act. Schedule - I (Section 90) Amendments to the Indian penal code (45 of 1860) 1. After Section 29, the following section shall be inserted, namely; 29 A. Electronic record The words electronic record shall have the meaning assigned to them in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000. 2. In Section 167, for the words, such public servant, charged with the preparation or translation of any document, frames or translates that document, the words such public, charged with the preparation or translation of any document or electronic record, frames, prepares or translates that document or electronic record shall be substituted. 3. In Section 172, for the words produce a document in a Court of Justice the words produce a document or an electronic record in a Court of Justice shall be substituted. 4. In section 173, for the words to produce a document in a Court of Justice the words to produce a document or electronic record in a Court of Justice shall be substituted. 5. In Section 175, for the word document at both the places where it occurs, the words document or electronic record shall be substituted 6. In section 192, for the words make any false entry in any book or record, or makes any document containing a false statement, the words makes any false entry in any book or record, or electronic record or makes any document or electronic record containing a false statement shall be substituted. 7. In section 204, for the word, document at both the places where it occurs, the words document or electronic record shall be substituted. 8. In section 463, for the words, whoever makes any false documents or part of a document with intent to cause damage or injury, the words whoever makes any false documents or false electronic record or part of a document or electronic record, with intent to cause damage or injury shall be substituted.
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9. In section 464 a for the portion beginning with the words A person is said to make a false document and ending with the words. By reason of deception practiced upon him. He does not know he contents of the documents or the nature of the alteration the following shall be substituted, namely: A person is said to make a false document or false electronic record First who dishonestly or fradulently a. makes, signs, seals or executes a document or part of a document; b. makes or transmits any electronic record or part of any electronic record; c. affixes any Digital signature on any electronic record; d. makes any mark denoting the execution of a document or the authenticity of the Digital signature with the intention of causing it to be believed that such document or part of document, electronic record of Digital signature was made, signed, sealed, executed, transmitted or affixed by or by the authority of a person by whom or by whose authority he knows that it was not made, signed, sealed, executed or affixed or Secondly - who without lawful authority, dishonestly or fraudulently, by cancellation or otherwise, alters a document or an electronic record in any material part thereof, after it has been made, executed or affixed with digital signature either by himself or by any other person, whether such person be living or dead at the time of such alteration or Thirdly - Who dishonestly or fraudulently causes any person to sign, seal, execute or alter a document or an electronic record or to affix his Digital signature on any electronic record knowing that such person by reason of unsoundness of mind or intoxication cannot, or that by reason of deception practised upon him, he does not know the contents of the document or electronic record or the nature of the alteration. b) after Explanation 2, the following Explanation shall be inserted at the end, namely Explanation 3 : For the purposes of this section, the expression, affixing Digital signature shall have the meaning assigned to it in clause (d) of sub-section (1) of section 2 of the Information Technology Act, 2000. 10. In Section 466 a) for the words whoever forges a document the words, whoever forges a document or an electronic record shall be substituted. b) the following explanation shall be inserted at the end, namely Explanation : For the purpose of this section, register includes any list, data or record of any entries maintained in the electronic form as defined in clause (r) of sub section (1) of section 2 of the Information Technology Act, 2000.
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11. In section 468, for the words document forged the words, document or electronic record forged shall be substituted. 12. In section 469, for the words, intending that the document forged the words intending that the document or electronic record forged shall be substituted. 13. In section 470, for the word document in both the places where it occurs, the words document or electronic record shall be substituted. 15. In Section 474, for the portion beginning with the words, whoever has in his possession any document and ending with the words, if the document is one of the description mentioned in section 466 of this Code, the following shall be substituted, namely whoever has in his possession any document or electronic record, knowing the same to be forged and intending that the same shall fraudulently or dishonestly be sued as a genuine, shall if the document or electronic record is one of the description mentioned in section 466 of this Code. 16. In Section 476, for the words any document the words any document or electronic record shall be substituted. 17. In Section 477A, for the words, book, paper, writing at both the places where they occur, the words, book, electronic, record, paper, writing shall be substituted. Schedule II (Section 92) Amendments to the Indian evidence act, 1872 1. In Section3 a. in the definition of Evidence for the words, all documents produced for the inspection of the court the words, all documents including electronic records produced for the inspection of the Court shall be substituted. b. after the definition of India, the following shall be inserted, namely the expressions Certifying Authority, Digital signature, Digital Signature Certificate, electronic form, electronic records, information, secure electronic record, secure Digital signature, and subscriber shall have the meanings respectively assigned to them in the information Technology act, 1999. 2. In Section 17, for the words, oral or documentary the words oral or documentary or contained in electronic form shall be substituted. 3. After section 22, the following section shall be inserted, namely -22A. When oral admission as to contents of electronic records are relevant Oral admissions as to the contents of electronic records are not relevant, unless the genuine less of the electronic record produced is in question. 4. In section 34, for the words, Entries in the books of account the words Entries in the books of account, including those maintained in an electronic form shall be substituted.
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5. In section 35, for the word record in both the places where it occurs, the words record or an electronic record shall be substituted. 6. For section 39, the following section shall be substituted, namely; 39.What evidence to be given when statement forms part of a conversion, document, electronic, record, book or series of letters or papers. When any statement of which evidence is given forms part of a longer statement, or of a conversation or part of an isolated document, or is contained in document which forms part of a book, or is contained in part of electronic record or of a connected series of letters of papers, evidence shall be given of so much and no more of the statement, conversation, document, electronic record book or series of letters or papers as the Court considers necessary in that particular case to the full understanding of the nature and effect the statement, and of the circumstances under which it was made. 7. After section 47, the following section shall be inserted, namely 47A. Opinion as to digital signature when relevant. When the court has to form an opinion as to the Digital signature of any person, the opinion of the Certifying Authority which has issued the Digital signature Certificate is a relevant fact. 8. In section 59, for the words contents of documents the words, contents of documents or electronic records shall be substituted. 9. After section 65, the following sections shall be inserted, namely 65A. Special provision as to evidence relating to electronic record .The contents of electronic records may be proved in accordance with the provisions of Section 65 B. 65B. Admissibility of electronic records. 1. Notwithstanding anything contained in this Act, any information contained in an electronic record which is printed on a paper, stored, recorded or copied in optical or magnetic media produced by a computer (hereinafter referred to as the computer output) shall be deemed to be also a document, if the conditions mentioned in this section are satisfied in relation to the information and computer in question and shall be admissible in any proceedings, without further proof or production of the original, as evidence of any contents of the original or of any fact stated therein of which direct evidence would be admissible. 2. The conditions referred to in sub-section (1) in respect of a computer output shall be the following, namely - a. the computer output containing the information was produced by the computer during the period over which the computer was used regularly to store or process information for the purposes of any activities regularly carried on over that period by the person having lawful control over the use of the computer; a. during the said period, information of the kind contained in the electronic record or of the kind from which the information so contained is derived was regularly fed into the computer in the ordinary course of the said activities;
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b. throughout the material part of the said period, the computer was operating properly or, if not, then in respect of any period in which it was not operating properly or was out of operation during that part of the period, was not such as to affect the electronic record or the accuracy of its contents; and c. the information contained in the electronic record reproduces or is derived from such information fed into the computer in the ordinary course of the said activities. 3. Whereover any period, the function of storing or processing information for the purposes of any activities regularly carried on over that the period as mentioned in clause (a) of sub-section (2) was regularly performed by the computer, whether a. by a combination of computers operating over that period; or b. by different computers operating in succession over that period; or c. by different combinations of computers operating in succession over that period; or d. in any other manner involving the successive operation over that period, in whatever order, of one or more computers and one or more combinations of computers, all the computers used for that purpose during that period shall be treated for the purposes of this section as constituting a single computer, and references in this section to a computer shall be construed accordingly. 4. In any proceedings where it is desired to give a statement in evidence by virtue of this section, a certificate doing any of the following things, that is to say. a. identifying the electronic record containing the statement and describing the manner in which it was produced. b. giving such particulars of any device involved in the production of that electronic record as may be appropriate for the purpose of showing that the electronic record was produced by a computer, c. dealing with any of the matters to which the conditions mentioned in subsection (2) relates. and purporting to be signed by a person occupying a responsible official position in relation to the operation of the relevant device or the management of the relevant activities (whichever is appropriate) shall be evidence of the matter stated in the certificate, and for the purposes of this sub-section it shall be sufficient for a matter to be stated to the best of the knowledge and belief of the person stating it. 5. For the purposes of this section a information shall be taken to be supplied to a computer if it is supplied thereto in any appropriate form and whether it is so supplied directly or (with or without human intervention) by means of any appropriate equipment;
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b. whether in the course of activities carried on by any official, information is supplied with a view to its being stored or processed for the purposes of those activities by a computer operated otherwise than in the course of those activities, that information, if duly supplied to that computer, shall be taken to be supplied to it in the course of those activities; c. a computer output shall be taken to have been produced by a computer whether it was produced by it directly or (with or without human intervention) by means of any appropriate equipment. Explanation: For the purposes of this section any reference to information being derived from other information shall be a reference to its being derived there from by calculation, comparison or any other proceSecs. 10. After section 67, the following section shall be inserted, namely -67A. Proof as to Digital signature. Except in the case of a secure Digital signature, if the Digital signature of any subscriber is alleged to have been affixed to an electronic record the fact that such Digital signature is the Digital signature of the subscriber must be proved. 11. After section 73, the following section shall be inserted, namely 73A.Proof as to verification of Digital signature In order to ascertain whether a Digital signature is that of the person by whom it purports to have been affixed, the court may direct a. that person or the controller or the Certifying Authority to produce the Digital Signature Certificate. b. any other person to apply the public key listed in the Digital Signature Certificate and verify the Digital signature purported to have been affixed by that person. Explanation: For the purposes of this section, controller means the controller appointed under sub-section (1) of section 17 of the Information Technology Act 2000. 12. After section 81, the following section shall be inserted, namely -81A. Presumption as to Gazettes in electronic forms. The court shall presume the genuineness of every electronic record purporting to be the Official Gazette, or purporting to be electronic record directed by any law to be kept by any person, if such electronic record is kept substantially in the form required by law and is produced from proper custody. 13. After Section 85, the following sections shall be inserted, namely -85A. Presumption as to electronic agreements. The court shall presume that every electronic record purporting to be an agreement containing the Digital signatures of the parties was to concluded by affixing the Digital signature of the parties.
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85B. Presumption as to electronic records and Digital signatures. 1. In any proceedings involving a secure electronic record, the court shall presume unless contrary is proved, that the secure electronic record has not been altered since the specific point of time to which the secure status relates. 2. In any proceedings, involving secure Digital signature, the court shall presume unless the contrary is proved that a. the secure Digital signature is affixed by subscriber with the intention of signing or approving the electronic record; b. except in the case of a secure electronic record or a secure Digital signature, nothing in this section shall create any presumption relating to authenticity and integrity of the electronic record or any digital signature. 85C. Presumption as to Digital signature certificates The court shall presume, unless contrary is proved, that the information listed in a Digital Signature Certificate is correct, except for information specified as subscriber information which has not been verified, if the certificate was accepted by the subscriber. 14. After section 88, the following shall be inserted, namely: 85A. Presumption as to electronic messages The court may presume that an electronic message forwarded by the originator through an electronic mail server to the addressee to whom the message purports to be addressed corresponds with the message as fed into his computer for transmission; but the court shall not make any presumption as to the person by whom such message was sent. Explanation : For the purpose of this section, the expressions addressee and originator shall have the same meanings respectively assigned to them in clauses (b) and (za) of sub-section (1) of section 2 of the Information Technology Act, 2000. 15. After section 90, the following section shall be inserted, namely 90A. Presumptions as to electronic records five years old Where any electronic record, purporting or proved to be five years old, is produced from any custody which the Court in the particular case considers proper, the Court may presume that the Digital signature which purports to be the Digital signature of any particular person was so affixed by him or any person authorized by him in this behalf. Explanation : Electronic records are said to be in proper custody if they are in the place in which, and under the care of the person with whom, they naturally be; but no custody is improper if it is proved to have had a legitimate origin, or the circumstances of the particular case are such as to render such an origin probable. This explanation applies also to Sec. 81A.
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16. For section 131, the following section shall be substituted, namely 131. Production of documents or electronic records which another person, having possession, could refuse to produce. No one shall be compelled to produce documents in his possession or electronic records under his control, which any other person would be entitled to refuse to produce if they were in his possession or control unless such last mentioned person consents to their production. Schedule III (Section 93) Amendments to the bankers books evidence act, 1891 1. In section 2 a) for clause (3), the following clause shall be substituted, namely 3) bankers books include ledgers, day-books, cash-books, account books and all other books used in the ordinary business of a bank whether kept in the written form or as print outs of date stored in floppy, disc, tape or any other form of electro-magnetic storage device; b) For clause (8) the following clause shall be substituted, namely 8. certified copy means when the books of a bank a) are maintained in written form, a copy of any entry in such books together with a certificate written at the foot of such copy that it is true copy of such entry, that such entry is contained in one of the ordinary books of the bank and was made in the usual and ordinary course of business and that such book is still in the custody of the bank, and where the copy was obtained by a mechanical or other process which in itself ensured the accuracy of the copy, a further certificate to that effect, but where the book from which such copy was prepared has been destroyed in the usual course of the banks business after the date on which the copy had been so prepared, a further certificate to that effect, each such certificate being dated and subscribed by the principal accountant of manager of the bank with his name and official title; and b) consist of printouts of data stored in a floppy, disc, tape, or any other electro-magnetic date storage device, a printout of such entry or a copy of such printout together with such statements certified in accordance with the provisions of section 2A. 2. After section 2, the following section shall be inserted, namely 2A. conditions in the printout A printout of entry or a copy of printout referred to in sub-section (8) of section 2 shall be accompanied by the following namely a) a certificate to the effect that is a printout of such entry or a copy of such printout by the principal accountant or branch manager; and b) a certificate by a person in charge of computer system containing a brief description of the computer system and the particulars of c) the safeguards adopted by the system to ensure that date is entered or any other operation performed only by authorised persons;
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d) the safeguard adopted to prevent and detect unauthorised change of data e) the safeguards available to retrieve data that is lost due to systemic failure or any other reasons; f) the manner in which data is transferred from the system to removable media like floppies, discs, tapes or other electro-magnetic data storage devices; g) the mode of verification in order to ensure that data has been accurately transferred to such removable media; h) the mode of identification of such data storage devices; i) the arrangements for the storage and custody of such storage devices; j) the safeguards to prevent and detect any tampering with the system; and k) any other factor which will vouch for the integrity and accuracy of the system. c) a further certificate from the person in charge of the computer system to the effect that to the best of his knowledge and belief, such computer system operated properly at the material time, he was provided with all the relevant data and the printout in question represents correctly, or is appropriately derived from, be relevant data. Schedule IV (Section 94) Amendment to the Reserve Bank of India act, 1934 In the Reserve Bank of India Act, 1934, in section 58, in sub-section (2), after clause (p), the following clauses shall be inserted, namely -(pp) the regulation of fund transfer through electronic means between the banks or between the banks and other financial institutions referred to in clause (c) of section 45-1, including the laying down of the conditions subject to which banks and other financial institutions shall participate in such fund transfers, the manner of such fund transfers and the rights and obligations of the participants in such fund transfer. Have you understood ? I-Objective questions : 1. Information Act was passed in ___________ a.2001 b.2000 c. 2001 d.1999 2. Person who is intended by the originator to receive the electronic record but does not include any intermediary is called the ________________ a. addressor b. acceptor c. addressee d. assignee 3. Authentication of any electronic record by a subscriber by means of an electronic method or procedure in accordance with the provisions of section 3 is known as _______________ a. electronic record b. digital signature c. electronic record d. function 4. ____________________ is a term used to describe the act of destroying or deleting or altering any information residing in a computer resource or diminishing its value or utility, or affecting it injuriously in spite of knowing that such action is likely to cause wrongful loss or damage to the public or that person.
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a. tampering b. hacking c. flashing d. publication 5. _________________ means a representation of information, knowledge, facts concepts or instructions which are being prepared or have been prepared in a formal manner. a. data b. information c. knowledge d. sources Answers 1.b 2.c 3.b 4.b 5. a II-Short Answers questions : 6. What are the objectives of the Information Technology Act, 2000? 7. Define Secure System 8. Explain Electronic Governance 9. What are the duties of certifying authorities under the I.T.Act 2000? III- Long Answer questions : 10. Explain the provisions of the I.T.Act 2000 relating to attribution, receipt and dispatch of electronic records. 11. What are the different types of penalties for damages to computer, computer systems or network under the I.T.Act 2000 ? Summary The digital technology era make effort to facilitate the human life as much as possible in transaction of their daily busineSecs. Now a days business involves computers more to create, transmit and store and retrieve and speedier to communicate. The people are well known about the risk and challenges involved in the electronic form of business, they are some times reluctant to conduct business or conclude and transaction in the electronic from due to lack of appropriate legal framework. As we see the basic hurdles to facilitate electronic commerce and electronic governance, we need the legal governance for the electronic writing and digital signature for legal recognition. This urgency makes the necessity for legal authentication for the busineSecs. The Information Technology Act 2000 solves the basic functions of these challenges of electronic transactions. This facilitates e-commerce as a successful entity.
MBA / Distance Mode / DBA 1607 / April 2007 / 3000 Copies
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DBA 1607

LEGAL ASPECTS OF BUSINESS

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