Professional Documents
Culture Documents
PREFACE
This Business Environment & Law module seeks to discuss the concept of
Business Law & their application in the organization. The book is designed
for use in graduate & post graduate courses for self study for students and
for the faculty as well. An attempt has been made to relate theory to practice
to make it understandable easily for students.
Each chapter is having various illustrations relating to each topic covered
and followed by numerous questions and multiple choice questions also,
which are designed to reinforce concepts & procedure presented in the body
of chapter.
I wish to express my sincere thanks to many of the authors who have
received due acknowledgements, without whom, this module would not
have been completed.
I have taken every possible effort to remove the errors either of principle or
of printing. Even then, if the reader comes across any error, he/she is
requested to point out the same to me.
I hope that many students will find this module interesting & helpful.
Further suggestion for the improvement of the module is solicited.
Tanu Agrawal
Syllabus
BUSINESS ENVIRONMENT & LAW
Course Code:
Course Objective:
To give insight to various Business and corporate Laws so that the students are able to
interpret the provisions of some of the important laws and apply the same in commercial
and industrial enterprises.
Course Contents:
Module I: Legal Environment of Business
Environment of Business, Its importance, Legal environment of business
Module II: Indian Contract Act, 1872
Nature and kinds of Contracts, Concepts related to offer, Acceptance and Consideration,
Principles Governing Capacity of Parties and Free Consent, Legality of Objects,
Performance and Discharge of Contract, Breach of Contract and its Remedies, Basic
Elements of Laws Relating to Agency, Guarantee and Pledge.
Module III: Indian Sale of Good Act, 1930
Sale and Agreement to Sell, sale & Hire Purchase, sale & barter., sale & bailment, sale &
contract for work & material,
Goods Different types of Goods, effect of destruction of goods, Conditions and
Warranties, performance of contract of sale, Doctrine of Caveat emptor, Transfer of
property, Rights of an Unpaid Seller.
Module IV: Negotiable Instruments Act, 1881
Meaning of Negotiability and Negotiable Instruments Cheques, Bill of Exchange and
Promissory Note Crossing of Cheques , negotiation, Endorsement, assignment
Dishonour of Cheques.
Module V: Elements of Company Law
Meaning and types of companies, Formation of a company, Memorandum and Articles of
Association, Prospectus and Issue of Shares, Share Capital and Shareholders, Company
Meeting and Proceedings, Powers and Liabilities of Directors and Winding up of
Company.
Module VI: Consumer Protection Act, 1986
Need for Consumer Protection Meaning of Consumer- Different redressal agencies for
Consumers, Rights of Consumers, Unfair Trade Practices, Procedure for Filling
Complaints.
Master of Finance & Control Copyright Amity university India
Page 1
INDEX
Chapter No.
Chapter Name
Page No.
Chapter 1
Environment Of Business
Chapter 2
15
Chapter 3
22
Chapter 4
Special Contracts
37
Chapter 5
57
Chapter 6
92
Chapter 7
119
Chapter 8
134
Chapter 9
146
Chapter 10
Prospectus
162
Chapter 11
Meetings
170
Chapter 12
Directors
181
Chapter 13
Winding Up
195
Chapter 14
209
Page no 220
Page no 221
Page no 222
CHAPTER 1
ENVIRONMENT OF BUSINESS
After reading this lesson, you will be conversant with:
1.1 What is environment?
1.2 Relationship between business & environment
1.3 Characteristics of environment
1.4 Environmental scanning
1.5 Types of environment
1.6 Dimension of general environment
1.7 Benefits of environmental analysis
1.8 Limitations of environmental analysis
1.1 What is environment?
Environment literarily means the surroundings, external objects, influences or
circumstances under which someone or something exists. The environment of any
organization isthe aggregate of all conditions, events and influences that surround and
affect it-Davis, K, The Challenge of Business, (New york: Mcgraw Hill, 1975), P43
Environment refers to all external forces that have a bearing on the functioning of a
business. Jauch and Gluecke define environment thus: The environment includes factors
outside the which can lead to opportunities or a threat to the firm. Although there are
many factors, the most important of these sectors are socio-economic, technological,
supplier, competitor and the government
Business is all about reaping profits from the opportunities available in the environment
Opportunity can manifest themselves in the form of short supply, excess demand, latent
need or new better and economical sources of supply or manufacturing.
Every business operates in a particular environment and each business unit has its own
environment. A change in environment presents opportunity to some and threat to others.
Sometimes, in the same industry, a relevant change in environment can a favorable of the
opposite impact on different units of the same industry.
For instance, the General Agreement on Trade and Services (GATS) implemented in
India on January 1,2005, is an opportunity for research-based pharmaceutical companies
like Ranbaxy but a threat for smaller companies. In the long run, only those organizations
will survive that are able to forecast the environment early and can react in time to the
change in environment.
The recent changes in tariff rates have changed the toy industry of India with the market
now being dominated by Chinese products. A slight change in the Reserve Bank of
Master of Finance & Control Copyright Amity university India
Page 3
Macro Environment
The Macro/General environment consists of factors external to the industry that may
have a significant impact on the firms strategies. Here we will look at six broad
dimensions: demographic, socio-cultural, political/legal, technological, economic and
global.
1.6 Dimensions in General Environment
Demographic
Political/Leg
al
Economic
Business
S
oc
io
C
T
ul
ec
tu
h
re
n
G
ol
lo
o
ba
gi
l
ca
l
All these dimensions of general environment are interrelated. These dimensions not only
influence businesses, but also influence each other. After a political change in 1991, when
congress government came to power, major economic change took place in the form of
LPG, i.e., Liberalization, Privatization, and Globalizations. This led to and enhancement
in the technological environment of the country. This technological and economical
change has transformed the socio-culture environment of the country.
Globalization has also enabled India to become the software superpower of the world. All
global organizations now have a new and vast market, as well as cheap manufacturing
hub, which has compelled them to change their global marketing and manufacturing
strategies.
With this, over the last ten years there has been a drastic change in the Indias
demography per capita incomes have risen. The number of young achievers and high
earners has increased drastically, which changed the entire demand schedule of products.
Master of Finance & Control Copyright Amity university India
Page 7
Impact of technology on human being, the man machine system, and the
environmental effect of technology.
Factor Endowment
Local Demand
Condition
Micro Environment
Micro environment of the competitive environment refers to the environment which and
organization faces in its specific arena. This arena may be an industry, of it may be what
is referred to as a strategic group.
Besides looking at primary demand and supply factors, firms examine the state of
competition they face because that determines whether that determines whether they will
remain in the same industry or start a new one. All the business decisions-what business,
pricing, distribution channel, promotion portfolio, etc. depends on competitive position of
the firm.
For instance, a new entrant in the glucose biscuit segment will have to study and consider
the marketing mix as well as strategy of existing players like Britannia, Parle, Priyagold,
etc., before deciding its marketing mix following are the key Micro Environment factors:
The Five Forces of Competition
Professor Michael Porter of the Harvard Business School has demonstrated the state of
competition in an industry as a composite of five composite of competitive forces.
According to Michael Porter the five forces of competition are:
a. Threat of Competitors: The rivalry among sellers in the industry.
b. Threat of New Entrants: The potential entry of new competitors.
c. Threat of Substitutes: Market attempts of companies in other industries to win
customers over to their own substitute products.
d. Bargaining Power of Supplier: The competitive pressure stemming from the
supplier-seller collaboration and resultant bargaining.
e. Bargaining Power of Buyers: The competitive pressure stemming from sellerbuyer collaboration and bargaining.
Michael Portes Five Forces Model
Threat of Substitutes
Bargain Power
of supplier
Threat of Competitor
Bargain Power
of Buyer
Socio-economic sectors
Technological sectors
Competitive sectors
All of above
Chapter 2
LEGAL ENVIRONMENT OF BUSINESS
-INTRODUCTION TO LAW
After reading this lesson, you will be conversant with:
2.1 The meaning of law
2.2 Nature & Definition of Law
2.3 Functions and Purpose of Law
2.4 Advantages of Law
2.5 Disadvantages of Law
2.6 Kinds of Laws
2.7 Sources of Law
2.1 Introduction:
Business laws are essential for the students of management to understand the legal rules
and aspects of business. Just like any other study even business management is
incomplete without a proper study of its laws. Any form of business needs legal
sanction. Therefore, it is imperative that a manager understands the various ways in
which businesses can be organized. This subject introduces some of the common forms
of business organizations, including some forms unique to India like the Joint Hindu
Undivided Family firm. Different types of organizations like Sole Ownership,
Partnership, Private Limited Company, Public Limited Company, Joint Stock Company
along with the rationale for adopting these forms are explored.
What form of business organization is the best under a particular set of conditions?
What advantage or disadvantage does it have over other forms of business? Formalities
to be gone through and some the quasi-legal processes required for starting a business
will be discussed in detail in this subject.
For the proper working of the society, there must exist a code of conduct. As you all
know, in the ancient times the society was not organized. The rights of the individuals
were not recognized. Gradually, the society evolved and the state came into being. As
we all know, to regulate the state, there should be a specific code of conduct, which
should be followed by everyone. As a result of which law evolved as a system of rights
and obligations including all the rules and principles, which regulate our relations with
other persons and with the state. These rules and regulations took the form of statutes.
To enforce the law and to resolve the conflicts arising there from, courts of law were
setup by the state. Laws were made to govern almost every walk of life. You all must
Master of Finance & Control Copyright Amity university India
Page 16
2.
3.
The fixed principles of law protect the administration of justice from the
errors of individual judgment.
4.
ii.
iii.
ii.
iii.
iv.
Lastly, it is complex.
CHAPTER 3
INDIAN CONTRACT ACT, 1872
After reading this lesson, you will be conversant with:
3.1 Definition of a contract
3.2 Elements of contract
3.3 Essential elements of a valid contract
3.4 Restitution
3.5 Contingent Contracts
3.6 Persons who are Required to Perform Contracts
3.7 Discharge of Contract
3.8 Remedies for Breach of Contract
3.9 Quasi-contracts
The Indian Contract Act, 1872 provides the general principles and rules governing
contracts. All transactions that relate to the agreements and obligations of the
contracting parties, come under the purview of the Act. Special categories of contracts,
are governed by separate Acts. They are Partnership Act, Sale of Goods Act, Negotiable
Conditions of Acceptance
i.
An offer should be accepted only by the person to whom it is put forth. It is clear
by the rule of law that if A proposes to make a contract with B, C cannot substitute
himself with B without the consent of A. An acceptance may be withdrawn before it
reaches the offeror.
ii.
iii.
ii.
iii.
Past consideration is the one which pays for a past act or forbearance. An
act constituting consideration which took place and is complete before the
promise is made.
As per Section 23, there has to be a lawful consideration for a legal object in every
contract. Hence, the following aspects should not exist in case of consideration and object
for the contract to be declared as legal and binding.
1. It should not be Forbidden by Law:
2. Performance should not Defeat the Provisions of any Law
3. It should not be Fraudulent
4. It should not be Considered Immoral
6. LEGAL OBJECT. The sixth essential element of a valid contract is legal object. By
object it is to mean the purpose of the contract. Contracts with unlawful objects are
void.
7. CERTAINTY AND POSSIBILITY OF PERFORMANCE: the agreements in
which the meaning is not certain, or is not capable of being made certain, are void. The
uncertainty may exist because of quality, quantity, price or title of the subject matter.
The terms of contract should be certain. In Keshavlal Lallubhai Patel vs. Lalbhai
Trikumlal Mills Limited, the workers of the respondent Mill went on a strike expressing
their support to the Quit India Movement. As a result, the respondent mill was closed
and could not supply the textile goods to the appellants as agreed. In a letter seeking
extension of time the respondent mill cited the reason for the failure to supply goods
and stated that the delivery time of the goods stands extended until the normal state of
affairs is restored.
In Guthing vs. Lynn, the buyer of a horse agreed to pay 5 pounds extra, if the horse
proved to be lucky. The agreement was held to be void for uncertainty. The definition of
void agreements includes the wager agreements. Section 30 defines wager as an
agreement between the parties by which one promises to pay money or moneys worth
on the happening of some uncertain event in consideration of the other parties promise
to pay if the event does not happen.
3.4 RESTITUTION
When a contract becomes void, any benefit derived out of the contract by one party is
required to be restored to the other. It is significant to note that the law of restitution
covers only benefits received and not losses incurred. The principle of restitution is that
the defendant who has been unjustly enriched at the expense of the plaintiff is required
to make restitution to the plaintiff. There cannot be restitution where the parties are
Master of Finance & Control Copyright Amity university India
Page 31
Assignment of Contracts
Assignment of a contract means the transfer of rights and liabilities arising out of the
contract in favor of a third person either with or without the concurrence of other party
to a contract.
An assignment may take place either by the act of the parties or by operation of law.
3.7 DISCHARGE OF CONTRACT
We now come to the last stage of contracts. A contract is said to be discharged when the
rights and liabilities created by such contract come to an end. Contracts may be
discharged or terminated by:
1. Performance of the contract, or
2. By mutual consent, or
3. By lapse of time (by limitation), or
4. By operation of law, or
5. Impossibility of performance, or
6. By breach of contract.
Each of the various modes of discharge of contract are explained below:
1. Performance of Contract: The most obvious and meaningful way to discharge
a contract is to fulfill the terms and conditions agreed by each of the parties in the
contract. Section 38 provides for tender of performance. As per this section if the
promisor offers to perform his side of the contract, but the promisee does not
accept his performance the promisor is discharged from his liability. This is known
as attempted performance. The promisor may sue the promisee for the breach of
contract, if he so desires.
Master of Finance & Control Copyright Amity university India
Page 33
i. Actual breach of contract. Actual Breach of contract may take place in two
instances:
a.
Exemplary damages
Q7 Which of the following relationships does not raise presumption of undue influence?
a.Trustee & beneficiary
b.
Doctor & patient
c.Solicitor & client
d.
Landlord tenant
Q8 The contract entered with a lunatic during the times of his sound mind is
(a)
(b)
Valid
Void
(c)
Void abinitio
(d)
voidable
CHAPTER 4
SPECIAL CONTRACTS
After reading this lesson, you will be conversant with:
4.1 Contracts Of Indemnity
4.2 Contracts Of Guarantee
4.3 Kinds Of Guarantee
4.4 Consideration Of Guarantee
4.5 Suretys Liability
4.6 Limitation Of Suretys Liability
4.7 Rights Of The Surety
4.8 Discharge Of Surety
4.9 Bailment & Pledge
4.10 Duties Of A Bailor
4.11 Duties Of Bailee
4.12 Rights Of Finder Of Goods
4.13 Termination Of Bailment
4.14 Pledge
4.15 Rights And Duties Of Pawnee
4.16 Rights And Duties Of Pawnor
4.17 Contract Of Agency
4.18 Agent
4.19 Classification Of Agents
4.20 Duties Of Agent
4.21 Rights Of Agent
4.22 Duties Of Principle To Agent
4.23 Rights Of Principal
4.24 Termination Of Agency
4.25 Irrevocable Agency
Master of Finance & Control Copyright Amity university India
Page 39
The case of Goulston Discount Co. Ltd. vs Clark (1967), is an explicit example
of
express
contract
of
indemnity.
A and B go into a shop. B says to the shopkeeper let him (A) have the
goods, I will see you paid. The contract is one of indemnity.
The definition given in Sections 124 and is 125 of the Contract Act are not
exhaustive of the law of indemnity as it does not include implied promises to
indemnify and cases where loss arises from accidents and events that are not
depending on the conduct of the promisor or any other person.
Certain rights have been granted to the indemnity holder under Section 125.
Rights of Indemnity Holder When Sued
The promisee in a contract of indemnity, acting within the scope of his authority, is
entitled to recover from the promisor:
Master of Finance & Control Copyright Amity university India
Page 40
b.
all costs which he may be compelled to pay in any such suit if, in bringing
or defending it, he did not contravene the orders of the promisor, and acted as it
would have been prudent for him to act in the absence of any contract of
indemnity, or if the indemnifier authorized him to bring or defend the suit; and
c.
all sums to be paid under the terms of any compromise of any such
suit, provided the compromise is not contrary to the orders of the
indemnifier, and should be authorized by him.
Though the Indian Contract Act does not grant specific rights to the indemnifier, we can
however, as in English Law, draw the rights of the indemnifier to be the same as those of
the surety which are detailed in the foregoing parts.
The Indian Contract Act does not specify the time of commencement of the indemnifiers
liability. Different courts have been following different rules with regard to this. Some
courts contend that the indemnifiers liability will begin only when the indemnity holder
actually suffers a loss. On the other hand, some have held that an indemnity holder may
compel an indemnifier to fulfill his promise even before actually incurring the loss. Buckley
L J in Richardson, ex parte etc. made the following observation Indemnity is not given by
repayment after payment. Indemnity requires that the party to be indemnified shall never
be called upon to pay.
4.2 CONTRACTS OF GUARANTEE
Section 126 deals with contract of guarantee. According to this Section contract of
guarantee is a contract to perform the promise, or discharge the liability of a third
person in case of his default. The person who gives the guarantee is called the surety,
the person in respect of whose default the guarantee is given is called the principal
debtor, and the person to whom the guarantee is given is called the creditor. A
guarantee may be either oral or written.
The purpose of a contract of guarantee is to provide additional security to the creditor in
the event of default by the principal debtor. In a contract of guarantee, there are three
parties, i.e., the creditor, the debtor and the surety. Also, there are three contracts in a
contract of guarantee (i.e., between the creditor and the debtor, between the creditor and
the surety and between the debtor and the surety).
It should also be noted that a contract of guarantee presupposes the existence of a debt.
If there is no existing liability, there cannot be a guarantee. Therefore, if the debt to be
guaranteed is already time barred, guarantee given will not be valid and the surety will
be discharged from his liability.
4.3 KINDS OF GUARANTEE
A guarantee may be given retrospectively for an existing debt, or for future debt, or for
the good conduct or honesty of an employee, in which case the guarantee is called a
fidelity guarantee.
b.
I guarantee the payment of any amount lent by Prem to Arun subject to
a limit of Rs.5,000.
In the first instance, the guarantee given is restricted to a part of the debt whereas in the
second instance the guarantee given is for the entire debt subject to a limit. As earlier
discussed the distinction becomes important in case the debtor is declared insolvent. In
the given example assume that Arun is declared insolvent and his estate pays a dividend
of 25 paise in a rupee.
This will result in the following consequences:
a.
where guarantee is given for a part of the debt. Here, Prem will be able
to recover Rs.5,000 from Srinath (surety) and Rs.750 (1/4th of the balance of
Rs.3,000) from Aruns estate. After making the payment, Srinath (surety) steps
in the shoes of the creditor and can recover Rs.1,250 (i.e., 1/4th of Rs.5,000)
from Aruns estate.
b.
where guarantee is given for the entire debt subject to a limit, Prem will
succeed in recovering Rs.5,000 from Srinath (i.e., the guaranteed amount) and
Rs.2,000 (1/4th of the entire debt of Rs.8,000) from Aruns estate. Srinath will
not get any dividend from Aruns estate till the full amount of Rs.8,000 is paid to
Prem.
4.7 RIGHTS OF THE SURETY
a. Right against the Creditor:
The surety can exercise the following two rights against the creditor:
a.
Section 141 provides that a surety is entitled to all the securities of the
principal debtor in the possession of the creditor at the time when the contract of
Master of Finance & Control Copyright Amity university India
Page 44
c. Right to Indemnity
According to Section 145, in every contract of guarantee there is an implied promise by
the principal debtor to indemnify the surety, and the surety is entitled to recover from
the principal debtor whatever sum he has rightfully paid under the guarantee, but no
sums which he has paid wrongfully. Thus a surety is entitled to full indemnification
(i.e., he can recover not only the amount paid to the creditor but also any interest
thereon).
However, Section 145 lays down certain restrictions as to what the surety can claim.
a.
A surety can claim only that amount which he has actually paid to the
creditor.
b.
He cannot claim amounts paid by him negligently or wrongfully.
d. Suretys Right to Sue
i.
A suit can be filed to declare that the debtor shall be the person liable to
pay debt before the payment of principal debt and on the payment of the
principal debt the surety will be placed in the position of the creditor.
ii.
Suretys rights against the co-sureties: When a surety has paid more
than his share of debt to the creditor, he has a right of contribution from the
Where there is no consideration between the creditor and the principal debtor, the
surety is discharged.
Where a person gives guarantee on the condition that the creditor shall not act upon it
until another person joins in as co-surety, the guarantee is not valid if that other person
does not join.
4.9 BAILMENT & PLEDGE
Bailment and Pledge are special types of contracts which are regulated by Sections 148
to 181 of the Indian Contract Act, 1872. The word bailment takes its roots from the
French word bailor which means to deliver.
Master of Finance & Control Copyright Amity university India
Page 46
ii.
iii.
iv.
Where the bailor is not entitled to make the bailment, or to receive back
the goods, or to give directions, regarding them.
The bailor is entitled to file a suit for enforcing all the liabilities or duties
of the bailee.
ii.
The bailor can terminate the bailment if the bailee does, with regard to
the goods bailed, any act which is inconsistent with the terms of the bailment
(Section 153).
iii.
iv.
The bailor can sue a third party who by his act causes any injury or
deprives the bailee the possession and use of goods bailed.
4.11 DUTIES OF BAILEE
I. The bailee is duty bound to take reasonable care of the goods bailed, as he
would in similar circumstances take care of his own goods. According to Section
151, the bailee should take such care of the goods as a man of ordinary prudence
would take of his own goods. If the bailee has not acted in a prudent manner, he
cannot be excused by pleading that he had taken similar care of his own goods
also, and his goods, have also been lost or damaged along with those of the
bailor, or that the bailor had the knowledge that his goods were being kept in a
negligent manner.
II. The bailee should not make any unauthorized use of goods.
III. The bailee should not mix the goods of the bailor with his own goods, but keep
them
separate
from
his
own
goods.
Where the bailee mixes the bailors goods with those of his own with the bailors
consent, then the bailor and the bailee shall have an interest in the mixed goods in
proportion to their respective shares.
Where he mixes the goods without the consent of the bailor, two possibilities may
arise:
Where the goods can be separated: Where the goods of the bailor and the bailee
can be separated, then they will remain the owners in accordance with their
respective shares. However, the costs of separation as well as any damage arising
from the mixture will have to be borne by the bailee.
When the goods cannot be separated: The bailor can recover damages from the
bailee for the loss of the goods.
Master of Finance & Control Copyright Amity university India
Page 48
ii.
According to Section 167, if a person other than the bailor, claims the goods
bailed, the bailee may apply to the court to stop the delivery of the goods to the
bailor, and to decide the title to the goods.
iv.
vi.
Retain the goods (lien) till his dues are paid, in other words the bailee can
exercise a general lien. The bailee may also exercise a particular lien when the
contract requires him to use his skills.
4.12 RIGHTS OF FINDER OF GOODS
When a person finds an article and takes it into his custody, he assumes the role of a
bailee. He then has the same responsibilities like any other bailee.
Master of Finance & Control Copyright Amity university India
Page 49
According to Section 168, the finder of goods can exercise lien over the
goods till the owner reimburses the expenses incurred for the safe custody of the
goods.
ii.
Where the owner has announced a reward for recovery of the lost article,
the finder has the right to retain the goods till he receives the award.
iii.
if the owner cannot be found provided the bailee has made reasonable efforts;
if the owner refuses, upon demand, to pay the lawful charges of the finder;
the article is of perishable nature or that, which loses most of its value with
passage of time; or
if the lawful charges of the finder in respect of the goods found, amount to two
thirds of their value.
4.13 Termination of Bailment
A contract of bailment is terminated:
4.14 PLEDGE
According to Section 172, bailment of goods as security for payment of a debt or
performance of a promise is called pledge. The bailor is, in this case, called the
pledger or pawnor and the bailee is called the pledgee or pawnee.
In a pledge, the pawnor deposits any type of movable property with the pawnee. In
other words, actual transfer of possession should take place.
Essentials of a pledge may be summarized as under:
a. There should be a delivery of goods.
b. The purpose of delivery should be to make the goods bailed, serve as security
for the payment of a debt, or performance of a promise.
4.15 RIGHTS AND DUTIES OF PAWNEE
i.
The pawnee has a right to retain the goods not only for payment of the
principal debt or for performance of a promise but also for any expenses
incurred or interest accrued thereon.
ii.
The pawnee can sue the pawnor to recover from him any extraordinary
expenses incurred by him for the preservation of the goods pledged.
iii.
When the goods pledged have been obtained by the pawnor under a
voidable contract and where such contract has not been rescinded at the time of
According to Section 183, any person who is of the age of majority and
is of sound mind may employ an agent.
According to Section 184 of the Act, between the principal and the third
persons, any person may become an agent. But no person who is a minor and of
unsound mind can become an agent.
iii.
iv.
It is not essential that a contract of agency be entered into. It is sufficient
if a person acts on behalf of another and is accepted by the latter.
Rules of Agency
Agency revolves around two important rules:
I. Whatever a person can do personally, he can do through an agent with exception
to very few personal acts like marriage etc.
II. Qui Facit Per Alium, Facit Per se, in other words what is done with the help of
another is the act of the person himself.
4.18 AGENT:
An agent is employed to bring the principal into legal relations with third
persons or to represent him in dealings with third persons.
An agent is bound to follow all the lawful instructions of the principal but he is
not subject to the direct control and supervision of the principal.
A principal is liable for the acts of his agent done within the scope of his
authority.
Creation of Agency
i.
ii.
An agent is bound to conduct the business of the agency with as much skill as is
generally possessed by persons engaged in similar business unless the principal
has notice of his want of skill. The agent is always bound to act with reasonable
diligence, and to use such skill as he possesses; and to make compensation to his
principal, in respect of the direct consequences of his own neglect, want of skill
or misconduct, but not in respect of loss or damage which are indirectly or
remotely caused by such neglect, want of skill or misconduct.
iii.
iv.
v.
If an agent, without the knowledge of his principal, deals in the business of the
agency on his own account instead of on account of his principal, the principal is
entitled to claim from the agent any benefit which may have resulted to him
from the transaction. (Section 216)
vi.
An agent should not set up an adverse title to the goods which he receives from
the principal as an agent.
vii.
An agent is duty bound to pay sums received to the principal on his account.
viii.
An agent should protect and preserve the interests of the principal in
case of his death or insolvency.
ix.
An agent must not use confidential information entrusted to him by his
principal for his own benefit or against the principal.
x.
The agent must not make secret profit from the extract agency. He must
disclose any extra profit that he may make.
The following case aptly discusses this: In Kimber vs. Barber (1875), An agent
sold his own stock to his principal without disclosing this fact, at the prevailing
market price. Held, he was bound to account for any profit he made in the
transaction.
xi.
An agent must not allow his interest to conflict with his duty e.g. he must
not compete with his principal.
xii.
ii.
The agent has a right to retain any sums received on account of the
principal in the business of the agency, all moneys due to himself in respect of
his remuneration and advances made or expenses properly incurred by him in
conducting such business.
iii.
iv.
The employer of an agent is bound to indemnify him against the
consequences of all lawful acts done by such agent in exercise of the authority
conferred upon him.
v.
The agent has a right to receive compensation for injuries sustained due to
neglect or want of skill on part of the principal. Section 225 provides that an
agent can claim compensation under this section only if he proves:
(a) that some injury was caused to him; and (b) the injury was caused because of
the negligence of the principal.
In case the principal establishes the fact that the agent could have avoided the
consequences of the principals negligence by reasonable means and he failed to
do so, then the agent cannot recover compensation from the principal.
The agent cannot recover compensation from the principal if the injury has been
caused because of the nature of his employment.
vi.
vii.
where he has bought goods for his principal by incurring a personal liability, he
has a right of stoppage in transit against the principal, in respect of the money
which he has paid or is liable to pay; and
viii.
where he is personally liable to the principal for the price of the goods sold, he
stands in the position of an unpaid seller towards the buyer and can stop the
goods in transit on the insolvency of the buyer.
ii.
Thus, Section 223 entitles the agent to claim compensation in respect of acts done
in good faith though they cause injury to the rights of third persons.
Where a person employs another to do an act which is criminal, the employer is
not liable to the agent, either upon an express or an implied promise to indemnify
him against the consequences of that act.
iii.
iv.
If the principal suffers any loss due to disregard by the agent of the
directions by the principal, or by not following the custom of trade in the
absence of directions by the principal, or where the principal suffers due to lack
of requisite skill, care, or diligence on the part of the agent, he can recover
damages accruing as a result from the agent.
ii.
To obtain an account of secret profits and recover them and resist a claim
for remuneration.
iii.
When agent has incurred a personal liability the agency becomes irrevocable.
The principal cannot revoke the authority given to his agent after the authority
has been partly exercised, so far as regards such acts and obligations as arise
from acts already done in the agency. (Section 204)
The following example clearly explains this: A authorizes B to buy 1,000 bales of
cotton on account of A, and to pay for it out of As money remaining in Bs hands.
B buys 1,000 bales of cotton in his own name, so as to make himself personally liable
for the price. A cannot revoke Bs authority so far as regards payment for the cotton.
CHAPTER-5
INDIAN SALE OF GOOD ACT, 1930
After reading this lesson, you will be conversant with:
5.1 Definitions
5.2 Contract Of Sale
5.3 Sale And Agreement To Sell
5.4 Essentials Of A Contract Of Sale
5.5 Sale And Hire Purchase Agreement
5.6 Sale And Barter Or Exchange
5.7 Sale And Bailment
5.8 Sale And Contract For Work And Materials
5.9 Contract Of Sale How Made
5.10 Subject Matter Of A Contract Of Sale
5.11 Present Sale Of Future Goods
5.12 Contingent Goods
5.13 Effect Of Destruction Of Goods
5.14 Conditions & Warranties
5.15 Implied Conditions
5.16 Implied Warranties
5.17 Caveat Emptor
5.18 Transfer Of Property
5.19 Sale By Non-Owners
5.20 Performance Of Contract Of Sale
5.21 Delivery Of Goods
Master of Finance & Control Copyright Amity university India
Page 60
The law relating to sale of goods can be found in the Sale of Goods Act, 1930. The sale
of goods is the most common of all commercial contracts and hence the law relating to
this, is bound to be of importance to all classes of the community.
The general rules applicable to contracts are applicable to contracts of sale of goods as
well. The general provisions of the Indian Contract Act, continue to apply to contracts
for the sale of goods in so far as they are not inconsistent with the express provisions of
the Sale of Goods Act. The Act has not defined the term sale but contemplates two
parties to the contract a buyer and a seller and that the buyer accepts the goods for a
price.
5.1 DEFINITIONS:
1.
2.
Delivery means voluntary transfer of possession from one person to
another;
3.
Goods are said to be in a deliverable state when they are in such state
that the buyer would under the contract be bound to take delivery of them;
4.
Document of title to goods includes bill of lading, dock-warrant,
warehouse keepers certificate, wharfingers certificate, railway receipt,
[multimodal transport document,] warrant or order for the delivery of goods and
any other document used in the ordinary course of business as proof of the
possession or control of goods or authorizing or purporting to authorize, either
by endorsement or by delivery, the possessor of the document to transfer or
receive goods thereby represented;
5.
6.
Future goods means goods to be manufactured or produced or
acquired by the seller after making of the contract of sale;
7.
Goods means every kind of moveable property other than actionable
claims and money; and includes stock and shares, growing crops, grass, and
things attached to or forming part of the land which are agreed to be severed
before sale or under the contract of sale;
8.
A person is said to be insolvent who has ceased to pay his debts in the
ordinary course of business, or cannot pay his debts as they become due,
whether he has committed an act of insolvency or not;
11.
Property means the general property in goods, and not merely a special
property;
12.
13.
14.
Specific goods means goods identified and agreed upon at the time a
contract of sale is made; and
15.
Expressions used but not defined in this Act and defined in the Indian
Contract Act, 1872, have the meaning assigned to them in that act.
a.
n case the buyer defaults, the seller may sue for damages; in case the
seller defaults, the buyer has a personal remedy against the seller.
b.
Where there is a breach by any of the parties to a contract of sale, the
following will be the consequence.
If the buyer fails to pay the price, the seller may sue him; if the seller fails to
deliver the goods, the buyer may sue for delivery of the same or for conversion or
for damages.
6.
Violation of any of the conditions of an agreement to sell entitles the
buyer to rescind the contract.
However, in a sale, the breach of any condition will not be a ground for rejecting
the goods or treating the contract as rescinded. The breach can only be treated as
a breach of warranty.
7.
The property in the goods remains with the seller in the case of an
agreement to sell. He may sell the goods to a third party, although he will be
committing a breach.
In a sale, the goods cannot be resold by the seller. If he does so, the buyer can
recover the goods, sometimes from third parties.
8. The goods in an agreement of sale may not be specified or ascertained. In a sale,
the goods are specified and ascertained.
9.
A sale results in creation of a jus in rem (i.e., right to the buyer to enjoy
the goods as against the world at large including the seller) while an agreement
to sell results in jus in personam (i.e., right to the buyer against the seller to sue
for damages).
10.
In a contract of sale, in case the buyer becomes insolvent before making
payment, the seller is required to handover the goods to the official receiver or
the assignee. In such a situation, he can claim a rateable dividend for the price of
the goods.
The situation differs when it comes to an agreement to sell. Here, if the buyer
becomes insolvent and has not made payment, the seller is under no obligation to
part with the goods.
11.
In a contract of sale, if the seller becomes insolvent, the buyer can claim
the goods from the official receiver or assignee. In an agreement to sell, if the
seller is declared insolvent, the buyer can only claim a rateable dividend in case
he has already made payment
Master of Finance & Control Copyright Amity university India
Page 63
a contract
b.
c.
d.
goods
e.
f.
A contract of sale is made by an offer to buy or sell goods for a price and the
acceptance of such offer. The contract may provide for the immediate delivery of
the goods or immediate payment of the price or both, or for the delivery or
payment by installments or that the delivery or payment or both shall be
postponed.
ii.
Subject to the provisions of any law for the time being in force, a contract of
sale may be made in writing or by word of mouth, or partly in writing and partly
by word of mouth or may be implied from the conduct of the parties.
b.
c.
Absolute, or
Conditional.
When the contract is absolute, the seller undertakes to unconditionally sell the goods to
be acquired at a later stage. Where the contract is conditional, he contracts to sell goods
conditionally on their acquisition.
An absolute contract for sale of future goods can be categorized into:
a.
b.
Present sale of a chance of obtaining goods, or a sale of a mere
expectation dependent upon a chance.
5.11 PRESENT SALE OF FUTURE GOODS
a. In reality this is not a sale but an agreement to sell as one cannot transfer the property
in goods which is not in existence. In effect, this is provided by Subsection (3) of
Section 6, which states that such a contract is a mere agreement to sell.
In such contracts the property in the goods passes to the buyer at a later stage as in the
following cases:
i. If the seller after acquiring the goods, expresses an intention to execute the original
agreement.
In Lunn vs. Thornton, it was held that a deed of bargain and sale cannot pass the
property in goods which do not belong to the grantor at the time of execution of the
deed, unless there is some new act done by the grantor after he acquires the property,
indicating his intention that such subsequently acquired property should so pass.
ii. If the buyer gets control and possession of the goods under authority to seize them.
In Congreve vs. Evetts, growing crops were seized and taken possession under a bill of
sale. Before a sale could be executed, a judgment was delivered in favor of a creditor.
Consequently, the Sheriff seized the goods and sold them. The proceeds of the sale were
paid to the creditor. However, it was held that the purchaser of the bill of sale was
entitled to the proceeds.
iii.
Where the seller performs an act, thus irrevocably appropriating the goods to the
contract.
In Langton vs. Higgins, C agreed to sell to the plaintiff all the crop of oil of
peppermint growing on his farm in the year at a particular price. Subsequently, on Cs
request, the plaintiff sent bottles to C for filling the bottles with oil. C, having weighed
the oil, put it in those bottles, labeled them with the weight and prepared the invoices.
Master of Finance & Control Copyright Amity university India
Page 68
In Tailby vs. Official Receiver, a bill of sale assigned in favor of the mortgagor all the
book debts due and owing or which might during the continuance of the security
become due and owing. In this case, it was held that future property, possibilities and
expectancies are assignable in equity for value.
b. Present sale of a chance of obtaining goods: Here the sale is similar to an agreement to
sell. When the buyer agrees to such a sale, he takes the risk of the happening of the event.
The buyers contract is absolute. However, it is conditional on the part of the seller on the
existence of the chance. The subject matter in such an agreement may turn out to be of a
greater value or of a smaller value. This can be illustrated with the help of an example.
A pearl fisherman may haul oysters from the sea. The buyer of pearl oysters from a
pearl fisherman purchases a chance. The oysters may either yield pearls of a greater
value than the price paid or they may yield pearls of a lower value or even of no value.
Whatever be the outcome, the buyers contract is absolute. As he has purchased a
chance, he has to abide by its consequences.
Conditional Sale of Future Goods
A seller may also contract to sell goods conditionally on their acquisition. If the goods
do not arrive or fail, no action can be taken against the seller, except in a case where the
seller himself prevents the goods from coming into existence.
5.12 CONTINGENT GOODS
Subsection 2 of Section 6 lays down that a seller may also undertake to sell goods, the
acquisition of which is dependent upon a contingency.
In Jethalal C Thakkar vs. R N Kapur the defendant agreed to sell 1,000 shares of the
plaintiff within 12 months of the bank being converted into a Finance Corporation. In
case the first event failed to occur, he himself would take the 1,000 shares at the agreed
rate. The defendant failed to get the shares sold and consequently was sued by the
plaintiff.
In this case, it was held that a conditional obligation is a sort of quasi obligation
consisting of a possibility that a real obligation already exists, or may come into
existence in the future. The fulfillment of the condition is the transformation of the
potentiality into actuality. The failure of the condition is the failure of the chance to
become a fact.
5.13 EFFECT OF DESTRUCTION OF GOODS
Goods Perishing before Making of Contract
Where there is a contract for the sale of specific goods, the contract is void if the goods
without the knowledge of the seller have, at the time when the contract was made,
Master of Finance & Control Copyright Amity university India
Page 69
II.
III.
b.
c.
The terms property and possession have different meanings. Even though the
property in the goods has passed to the buyer, the seller might still have possession of
the same. Property in the goods means ownership of the goods while possession of
the goods means mere custody or control of the goods. Thus, a servant or an agent
entrusted with goods has possession of the same, but not the property in them.
Time when Property Passes
The time when property in the goods passes from the seller to the buyer is of
considerable importance. According to Section 26, unless otherwise agreed, the goods
remain at the sellers risk until the property therein is transferred to the buyer, but when
the property therein is transferred to the buyer, the goods are at the buyers risk,
Master of Finance & Control Copyright Amity university India
Page 75
Where there is a contract for the sale of specific or ascertained goods the
property in them is transferred to the buyer at such time as the parties to the
contract intend it to be transferred.
ii.
For the purposes of ascertaining the intention of the parties, regard shall be had
to the terms of the contract, the conduct of the parties and the circumstances of the
case.
ii.
iii.
In Acraman vs. Morrice, there was a contract for sale of timber from oak
trees. The selected portions were marked out by the buyer. The seller was
required to sever the rejected portions of the trees. However, before he
could remove the rejected portions, the seller became bankrupt. It was
held that the buyer could not take away the selected portion as the
property in goods had not yet passed to him.
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 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.
In Simmons vs. Swift, there was a contract for sale of a stack of bark. The contract
stipulated that the bark was to be weighed by the agent of the buyer as well as the seller.
Part of the bark was weighed and taken delivery. However, the other part was carried
away by floods before it could be weighed. It was held that loss incurred on the
unweighed portion was to be borne by the seller as the property in those goods had not
passed to the buyer.
Unascertained Goods and their Appropriation: Section 23
Where there is a contract for the sale of unascertained or future goods by description
and goods of that description and 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, the property in the goods thereupon passes to the buyer. Such assent
may be express or implied, and may be given either before or after the appropriation is
made. [Section 23(1)]
Where in pursuance of the contract, the seller delivers the goods to the buyer or to a
carrier or other bailee (whether named by the buyer or not) for the purpose of
Master of Finance & Control Copyright Amity university India
Page 78
When goods are sold on approval basis, it means that the buyer takes temporary
possession of the goods with an option to return them in case they are not satisfactory.
The principle underlying a contract for sale or return, is that the buyer takes
possession of the goods. He has a choice of returning the goods. However, the property
in the goods will pass to him if he accepts the goods, or if he does any act adopting the
transaction.
Illustration 1:
In Municipal Commissioners of Hoogly, Chinsurah Municipality vs. Spencer Limited,
the buyer of a tractor was given an option to reject the tractor if it were found to be old.
The agreement between the buyer and the seller was an oral agreement. Considering the
fact that the purchaser had used the tractor and that reasonable time had elapsed from
the date of purchase, it was held that the property in the goods had passed to the buyer.
Master of Finance & Control Copyright Amity university India
Page 79
Subsection 1 is based on the principle nemo dat quod non habet which means that no
man can pass a better title than he possesses.
For example, at a public auction, there was a sale of a horse. The fact that the horse
was a stolen one was not known to the auctioneer. The person who purchased the horse
acquired it in good faith. However, it was held that the buyer did not get any title
against the true owner. Lee vs. Bayes.
Section 27, however, lays down certain exceptions to the rule nemo dat quod non
habet. The seller of goods can confer a better title to the buyer:
a. Where he sells the goods with the authority and consent of the true owner.
Sales under this category include those made by agents acting within the scope of their
authority (whether express or implied) and sales made in the course of business by
persons holding a limited interest in the goods.
For instance, where goods are handed over to an agent by the principal for a particular
purpose, and the agent exceeding the authority given to him sells the goods, the
principal is entitled to recover the goods in spite of the disposal.
b. Where the true owner is prevented by his conduct from denying the sellers authority
to sell.
To establish the doctrine of estoppel it should be proved that the conduct of the true
owner was such, so as to lead an innocent buyer to believe that the seller was the true
owner. The true owner should have acted in a manner, so as to be precluded from
denying the lawfulness of the transaction. Mere carelessness on the part of the true
owner to protect or guard his goods will not serve as an estoppel.
In Mohambaram vs. Ram Narayan, the owner of a bus engaged an agent to ply the bus
for hire. A letter signed by himself and addressed to the District Magistrate requesting
for grant of G permit to the agent, along with the registration certificate of the vehicle
was left with the agent. The agent fraudulently altered the letter into one addressed to
the D.S.P requesting him to transfer the registration in the name of the agent. After the
vehicle was registered in the name of the agent, he sold it to a third person who took it
in good faith. It was held that the bus owner could not have contemplated fraud by the
agent and hence he could not be prevented from challenging the title of the buyer.
Master of Finance & Control Copyright Amity university India
Page 81
The person who is to pass title should have bought or agreed to buy the
goods.
ii.
iii.
The goods or documents of title to the goods should have been delivered
to a third person under a contract of sale, either by the buyer or his mercantile
agent.
iv.
The person receiving the goods or the documents should have taken it in
good faith and without notice of the lien or the right of the original seller.
h.
Where an unpaid seller who has exercised his right of lien or stoppage in transit re-sells
the goods, the buyer acquires a good title thereto as against the original buyer,
notwithstanding that no notice of the re-sale had been given to the original buyer.
As per Section 54(3), the validity of a re-sale is dependent upon:
I. The seller being an unpaid seller.
II. The exercise of the right of lien or stoppage in transit by the unpaid seller. (i.e,
the unpaid seller should have possession of the goods and the possession should
be lawful).
5.15 PERFORMANCE OF CONTRACT OF SALE
Performance of a contract with reference to the seller means the delivery of the goods
by him and with reference to the buyer it means the acceptance and payment of the
same, as per the terms of the contract. [Section 31]
For the purpose of Section 31, the term acceptance is defined by Section 42 of the Act.
As per Section 42, the buyer is deemed to have accepted the goods when he intimates to
the seller that he has accepted them, or 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
Master of Finance & Control Copyright Amity university India
Page 83
Subject to the provisions of this Act, the unpaid seller of goods who is in
possession of them is entitled to retain possession of them until payment or tender
of the price in the following cases, namely
a. Where the goods have been sold without any stipulation as to credit.
b. Where the goods have been sold on credit, but the term of credit has
expired.
c. Where the buyer becomes insolvent
2. The seller may exercise his right of lien notwithstanding that he is in possession of
the goods as an agent or bailee for the buyer.
In Imperial Bank vs. London & St Katherine Dock Co., it was held that even though the
delivery of a bill of lading transfers legal property, it does not affect the sellers right of
lien on the goods as long as they are in his possession.
Goods sold without any stipulation as to credit:
When goods are sold without any stipulation as to credit, the seller can retain the goods,
until the payment is made.
Goods sold on credit, but the term of credit has expired:
When goods are sold on credit, the possession of the goods is transferred to the buyer
immediately. However, if the seller has retained possession of the goods until the expiry
of the period of credit, the lien which was not available to him during that period, will
accrue to him on the expiry of the credit period, even though the buyer is not insolvent
at that time.
CHAPTER 6
NEGOTIABLE INSTRUMENTS ACT, 1881
After reading this lesson, you will be conversant with:
6.1 Definition Of Negotiable Instrument
6.2 Characteristics Of A Negotiable Instrument
6.3 Kinds Of Negotiable Instrument
6.4 Promissory Notes
6.5 Bills Of Exchange
6.6 Comparison Between A Promissory Note And A Bill Of Exchange
6.7 Bills In Sets
6.8 Cheques
6.9 Crossing Of Cheques
6.10 Modes Of Crossing
6.11 Capacity Of Parties
6.12 Parties To Negotiable Instruments
6.13 Liabilities Of Parties
6.14 Negotiation
6.15 Effect Of endorsement
6.16 Assignment
6.17 Endorsement
6.18 Dishonor Of A Negotiable Instrument
The Negotiable Instruments Act, 1881, (herein after referred to as Act), relates to
Promissory Notes, Bills of Exchange, Cheques and Hundies. The Act does not affect any
custom or usage nor does it affect the provisions of Section 31 and Section 32 of the
Reserve Bank of India Act, 1934. The provisions of Section 31 states that no other
person other than the Reserve Bank of India or the Central Government, can draw,
accept, make or issue any bill of exchange, hundi or promissory note payable to bearer
on demand nor make or issue any promissory note payable to the bearer of the
instrument. Section 32 provides that a person is punishable with fine if he issues a bill or
note payable to bearer on demand or a note payable to bearer.
6.1 DEFINITION OF NEGOTIABLE INSTRUMENT
According to Section 13 of the Act, Negotiable Instrument means a promissory note,
bill of exchange or cheque payable either to order or to bearer.
Justice Willis in his book The Law of Negotiable Securities has defined a negotiable
instrument as an instrument, the property in which is acquired by anyone who takes it
bona fide, and for value, notwithstanding any defect of title in the person from whom he
took it, from which it follows that an instrument cannot be negotiable unless it is such
and in such a state that the owner could transfer the contract or engagement contained
therein by simple delivery of instrument.
Master of Finance & Control Copyright Amity university India
Page 97
It must be in writing.
The basic objective of insisting that a promissory note should be in writing is to
exclude an oral agreement from the purview of the Act. The writing on the
promissory note may be either in pencil or ink and also includes printing,
lithography or any other form of depicting the words in a viewable form.
As long as the requirements of Section 4 are complied with, a promissory note will
be held valid. Further, it is the intention of the maker which has to be looked into.
The mere absence of the word promise will not render a note invalid provided the
maker has given an unconditional undertaking to make payment. On the other hand,
there are instances where a note may satisfy all the conditions as required by
Section 4 and may yet, not be a promissory
Note. For example, a bankers deposit note in the form Received of A Rs.1000 to
be accounted for on demand duly signed by the maker is not a promissory note.
ii.
iii.
In Yeruganti Chinna vs. Kota Egiri we shall order the borrowed moneys to be
repaid was held to constitute a promissory note.
Rs.1,200 balance due to you I am still indebted and do promise to pay.
I do acknowledge myself to be indebted to X in Rs.1,000 to be paid on
demand for value received.
The promise or undertaking to pay must be definite and unconditional.
In the case of Bardesley vs. Baldwin (1741), it was held that the promissory note
was a conditional one and hence, not enforceable. The facts of the case were: A
executed a promissory note stating I promise to pay Rs.1,000 to B, 30 days after
Master of Finance & Control Copyright Amity university India
Page 101
I promise to pay A Rs.300 and all other sums which may become due to him.
b.
me.
I promise to pay A, Rs.500 after deducting any amount which he may owe
c.
In Official Liquidator vs. Bishan Singh, a document which acknowledged a debt and
contained an undertaking to repay the debt along with interest (interest rate was not
specified) was held not to be a promissory note as the sum payable was uncertain.
However, in Seth Tulsidass Lalchand vs. Rajagopal, it was held that where the interest
rate was not specified, a rate of six percent would be applicable as per Section 80 of the
Act.
Section 17 of the Stamp Act, 1899 lays down that a promissory note should be stamped
before or at the time of its execution. Also, it is not compulsory to use adhesive stamps
while executing a promissory note. In case, an adhesive stamp is used, it should be
properly canceled so that it cannot be used again. A promissory note may also be
executed on paper on which adequate stamps have been embossed. In such a case, care
should be taken while writing the document. The matter should be written in such a
manner that the stamp appears on the face of the instrument and cannot be used for any
other instrument.
x It may be payable on demand or after a specified period.
Xi It cannot be made payable to bearer on demand.
6.5 Bill of Exchange
This form of negotiable instrument has been in usage for a very long time. It was
initially used for payment of debts by traders residing in one country to another country
with a view to avoiding transmission of coins. Now-a-days it is used as trade bills both
for domestic as well as foreign trade known as inland bills and foreign bills
respectively.
According to Section 5, A bill of exchange is 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.
A bill of exchange cannot be made by electronic means and hence Section 1(4)(a) of IT
Act applicable to cheques is not applicable to Bill of Exchange
Parties to a Bill of Exchange
There are basically three parties to a bill of exchange. They assume different roles
which are explained below:
The person who accepts the bill (he may be the drawee or a stranger on behalf
of drawee) is called the Acceptor.
The person who is in lawful possession of the bill is called the Holder.
The person who endorses the bill in favor of another person is called Endorser.
The person in whose favor the bill is endorsed is called the Endorsee.
Essentials of Bills of Exchange
i. It must be in writing.
ii. It must contain an unconditional order to pay when a bill of exchange is drawn
by the drawer it is assumed that the drawee has funds with him to pay to the
drawer. A bill of exchange contains an order by the drawer to the drawee, to make
payment to the payee. Therefore, if a bill contains a request to make payment, it is
likely to cause inconvenience and uncertainty. However, the use of few
expressions of politeness will not affect the validity of the bill. In Ruff vs. Webb,
an instrument that read Mr. AB will much oblige Mr. CD by paying to the order
of P was held to be a good bill. Excessive terms of politeness should be
avoided as it may give an impression that the communication contained in the bill
was not an order.
iii.
It must be in writing.
iv.
v.
vi.
It must comply with other formalities like number, date and consideration,
stamp, etc.
vii.
6.6 A comparison can be made between a promissory note and a bill of exchange.
This may be summarized as follows:
Master of Finance & Control Copyright Amity university India
Page 105
The liability of the maker of a note is primary and absolute whereas the liability
of the drawer of a bill is secondary and conditional.
The maker of a note is in the same position as an acceptor of a bill. Therefore,
except in a case where the note is payable at a certain place, presentment of the
instrument and notice of dishonor is not required to make him liable.
The maker of a note stands in immediate relation with the payee where as the
drawer of a bill stands in immediate relation with the acceptor and not the payee.
Where the cheque is crossed generally, the holder may cross it specially.
Where the cheque is crossed either generally or specially, the holder may add
the words not negotiable to the crossing.
A cheque that is crossed specially to a specified banker, may be crossed again by that
banker specially to another banker, his agent, for collection.
ILLUSTRATIONS:
The following is an illustration of how a cheque may be crossed:
A person who takes a cheque that bears the words not negotiable acquires no
better title than that of his immediate transferor. The true owner of the instrument
can claim the instrument or the money from the said person. However, under
Sections 128 and 131, the paying and collecting bank will be exonerated from any
liability if it can be proved that the payment and collection were made in good faith
and without negligence.
For example, a cheque that is payable to bearer and crossed generally with the
words not negotiable is stolen and subsequently comes into the hands of B
who takes the instrument in good faith and gives value for it. B pays the
cheque into his own account and his bank collects the payment from the drawee
bank. By virtue of Sections 128 and 131, the drawee bank and the collecting
bank are exonerated from liability on the cheque. However, as B does not
acquire a good title to the cheque, he is liable to refund the money to the true
owner. The cheque in the given case is not negotiable and therefore as regards
the true owner, B is in no better position than his immediate transferor.
The protection available to the collecting banker under Section 131, is however subject
to the following conditions:
a. The collecting bank should have acted in good faith and without negligence. The
question as to whether a bank had acted negligently or not would depend on the
circumstances and facts of each case. It is not necessary that negligence should relate
only to collection of a cheque.
It was held in Central Bank of India Limited vs. Gopinathan Nair, that negligence in the
opening of an account of the customer may prevent the bank from seeking protection
under Section 131.
Similarly, in Orbit Mining and Trading Co. Limited vs. Westminister Bank Limited,
failure on the part of the collecting banker to make necessary inquiries about the
customer, his occupation, employer, etc., was held to constitute negligence. However, it
was also held that the collecting bank is not required to continually keep itself updated
as to the identity of the customers employer.
b.
The collecting bank should have received payment on behalf of a customer.
Where the bank has received payment on behalf of a person who is not a customer of
the bank, then it cannot claim protection under Section 131.
c. Section 131 will not be applicable where the collecting bank is a holder for value.
This section affords protection to the bank only if bank is acting as an agent for
receiving payment. Where a bank advances money to the customer against the
cheque, even before the cheque is realized, then it is not an agent but is a holder for
value.
In Mclean vs. Clyesdale Banking Co., a customer had overdrawn his account with a
bank and later paid in a cheque to extinguish the overdraft. It was held that the bank
was a holder for value and not an agent for collection.
Lastly, the cheque should be crossed and the crossing should have been made
before the collecting bank receives the said cheque. Where an uncrossed cheque is
given to the bank for collection and where the bank crosses it, Section 131 cannot be
invoked.
6.11 CAPACITY OF PARTIES
According to Section 26, every person is capable of contracting, according to the law to
which he is subject, may bind himself and be bound by the making, drawing,
acceptance, indorsement, delivery and negotiation of a promissory note, bill of
exchange or cheque.
This section lays down that the capacity of a person to incur liability on a negotiable
instrument is coextensive with his capacity to contract. A person who is not competent
to contract, cannot be made liable on the instrument. However, the incapacity of one of
the parties to the instrument will in no way reduce/absolve the liability of other
competent parties to the instrument.
Under Section 11 of the Indian Contract Act, a minors contract is void and cannot be
ratified by him after he attains majority.
According to Section 26, a minor may draw, indorse, deliver and negotiate such
instruments as to bind all parties except himself.
Nothing herein contained shall be deemed to empower a corporation to make, indorse
or accept such instruments except in cases in which, under the law for the time being in
force, they are so empowered.
Where several persons are mentioned in a negotiable instrument as makers, drawers,
acceptors, indorsers and one of them is a minor, except the minor, other competent
parties will not be discharged from their liability.
It was held in Burgess vs. Merill, that the holder of a negotiable instrument can sue all
the adult parties to a bill, to the exclusion of the minor.
A minor cannot bind himself by accepting a bill or making a note. However, all the
other competent parties to the instrument will be liable. In Sulochana vs. Pandyan Bank
Limited, where a promissory note was jointly executed by a minor and her father, it was
held that the father was liable on the note.
Even though the minor cannot be made liable on a bill or a note, he can acquire all the
rights under it, and where the minor becomes the holder he is entitled to sue all the prior
parties to the instrument.
Master of Finance & Control Copyright Amity university India
Page 112
A person who has signed and delivered to another, a stamped but otherwise
inchoate instrument, is prevented 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. (Section 20)
ii.
iii.
If a bill or note is negotiated to a holder in due course, the other parties to the
bill or note cannot avoid liability on the ground that the delivery of the instrument
was conditional or for special purpose only. (Section 46)
iv. Once the negotiable instrument passes through the hands of a holder in due
course, it gets cleansed of all its defects, provided the holder is not a party to the
fraud. (Section 53)
v. The defenses on the part of a person liable on a negotiable instrument cannot be
set-up against a holder in due course if that negotiable instrument has been lost, or
Master of Finance & Control Copyright Amity university India
Page 115
The law presumes every holder as a holder in due course, although the
presumption is rebuttable.
vii.
viii.
6.14 NEGOTIATION
Section 46 of the Act reads as follows:
The making, acceptance or indorsement of a promissory note, bill of exchange or
cheque is completed by delivery, actual or constructive.
As between parties standing in immediate relation, delivery to be effectual must be
made by the party making, accepting or indorsing the instrument, or by a person
authorized by him in that behalf.
A promissory note, bill of exchange or cheque payable to bearer is negotiable by the
delivery thereof.
A promissory note, bill of exchange or cheque payable to order, is negotiable by the
holder by indorsement and delivery thereof.
For Example
1. A makes a promissory note in favor of B in respect of a debt owed by A to
B. After As death, the note is found among some of his papers. B cannot
recover the amount on this instrument, even if it is delivered to him.
2. A the drawee receives a bill from B who is the holder of the same. A accepts
the bill. However, on learning that the drawer has become bankrupt, he cancels his
Master of Finance & Control Copyright Amity university India
Page 119
6.17 ENDORSEMENT
Section 15 of the Act defines endorsement as the writing of a persons name on the face
or back of a negotiable instrument or on a slip of paper (called allonge) annexed
thereto, for the purpose of negotiation.
An endorsement can be blank or general, special or full, restrictive, partial and
conditional or qualified. An endorsement is said to be blank or general if the endorser
signs his name only on the face or back of the instrument. If the endorser signs his
name and adds a direction to pay the amount mentioned in the instrument to, or to
the order of a specified person, the endorsement is said to be special or in full. An
endorsement is restrictive which prohibits or restricts the further negotiation of the
instrument. An endorsement is partial which purports to transfer to the endorsee
only a part of the amount payable on the instrument. An endorsement is conditional
or qualified which limits or negatives the liability of the endorser
6.18 DISHONOR OF A NEGOTIABLE INSTRUMENT
Non-acceptance of a bill or non-payment results in dishonor of the instruments.
Dishonor by Non-acceptance
A bill of exchange is dishonored by non-acceptance:
i.
When the drawee does not accept it within 48 hours from the time of
presentment for acceptance.
ii.
When presentment for acceptance is excused and the bill remains unaccepted.
iii.
iv.
ii.
iii.
When the party is not likely to suffer any damage for want of notice:
It is not necessary either to present the instrument nor give a notice of dishonor if it can
be shown that when the bill was drawn there were no funds of the drawer in the hands
of the drawee.
Master of Finance & Control Copyright Amity university India
Page 124
When the party entitled to notice cannot after due search be found:
Notice of dishonor need not be given, where in spite of the reasonable efforts and
enquiries made by the holder, the party entitled to receive notice cannot be
located or traced.
v.
Where the party required to give notice, is unable to do so, without
any fault of his:
Where notice of dishonor could not be given due to accident, sickness or any
other calamity involving the holder or his agent, such omission is excusable.
Also, where delay in giving notice of dishonor is due to extraneous factors
beyond the control of the holder, such delay is excused. However, due notice will
have to be given once the cause of delay comes to an end.
vi.
vii.
viii.
Notice of dishonor is said to have been waived impliedly, where the person
entitled to receive notice, having full knowledge of facts, agrees, after dishonor,
to unconditionally make payment of the amount due on the instrument.
Noting and Protest
According to Section 99, noting means the recording of the fact of dishonor by a notary
public upon the instrument within a reasonable time after dishonor.
CHAPTER 7
MEANING AND TYPES OF COMPANIES
The Companies Act, 1956 provides a broad legal framework for the operation of
companies registered under this Act. Before the advent of this legislation, Companies
Act, 1913 which was extensively amended in 1936 on lines of the English Companies
Act, 1929, was in force. The Indian version of the Companies Act is the result of the
recommendations of the Company Law Committee formed under the Chairmanship of
Mr. H.C. Bhaba, which was constituted in 1950.
7.1 MEANING AND NATURE OF A COMPANY
Section 3(1) of the Companies Act defines a company as a company formed and
registered under this Act, or an existing company as defined under Section 3(1)(ii)
which lays down that an existing company means a company formed and registered
under any previous Company Law. Lord Justice Lindley defines a company as an
association of many persons who contribute money or monies worth to a common stock
and employed in some trade or business and who share the profit and loss arising
therefrom. The common stock so contributed is denoted in money and is capital of the
company. The persons who contributed to it or to whom it pertains to are the members.
The proportion of capital to which each member is entitled is his share. The shares are
always transferable although the right to transfer is often more or less restricted.
A company may be formed by coming together of a certain number of members and
getting the same registered and incorporated under the Companies Act.
iii.
iv.
Failure to Refund Application Money [Section 69 (5)]: If the directors
of the company fail to comply with the deadline for refunding the application
money with interest to unsuccessful applicants then they are severally and
Master of Finance & Control Copyright Amity university India
Page 132
Fraudulent Conduct [Section 542(1)]: If it appears in the course of windingup of the company that some business of the company has been carried on with
intent to defraud creditors, then the courts may declare that any persons who
were knowingly parties to the carrying-on of the business in this way are
personally responsible without any limitation of liability.
vii.
2. Common Seal
The case of Salomon vs. Salomon & Co. Ltd., also recognized the principle of limited
liability. The members of a limited company are only liable to contribute towards
payment of its debt to a limited extent. No member can be called upon to pay anything
more than the unpaid value of the shares held by him or the amount guaranteed by him.
In the case of companies formed with unlimited liability of members, the liability of the
members in such cases is not limited only to the extent of the face value of their shares
and the premium, if any, unpaid thereon but members will also be required to contribute
further to meet the debts of the company in the event of winding-up.
3. Separate Property
The wealth of the shareholders and the wealth of the company are separate. A member
does not even have an insurable interest in the property of the company. An
incorporated companies wealth is clearly distinguished from that of its members. As
Palmer puts it: The property is vested in the company as a body corporate, and no
changes of individual membership affect the title. The property, remains vested in the
company, and the company can convey, assign, mortgage, or otherwise deal with it
irrespective of these mutations.
Master of Finance & Control Copyright Amity university India
Page 133
4. Transferable Shares
The Companies Act provides that the shares or other interests of any member in a
company shall be movable property, transferable in the manner provided by the articles
of the company. A member may sell his share in the market without having to withdraw
the capital from the company.
7.3 KINDS OF COMPANIES
On the basis of membership pattern/size
Companies
(1)
Public
(2)
(3)
Private
Government
(a)
(b)
(a)
(b)
Unlisted
Listed
Independent
Subsidiary
of Public
Co.
(1)
(2)
( a)
(b)
(c)
Limited
By shares
Limited byLimited by
Guarantee & Guarantee
having share
capital
(2)
Indian
(Incorporated in India)
CompanyForeign
Company
(Company
incorporated
outside
India
but
having
place
of
business in India)
(2)
(Holding Company)
(Subsidiary Company)
These types of companies have been explained as under:
7.4 PRIVATE COMPANIES
A private company should have at least two persons (Section 12) to subscribe their
names to Memorandum and Articles of Association. Section 26 provides that a private
limited company must have articles of its own.
As per Section 3(1)(iii), a private company means a company which has a minimum
paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed,
and by its articles,
Restricts the right to transfer its shares, if any;
b.
i.
a.
ii.
a.
Restriction on transfer of shares: A private company is normally a
closely knit company with a very few members. Hence free transferability of
shares is restricted. It should be noted that it is a restriction imposed and not
prohibition. The articles usually provide that directors may in their absolute
discretion and without assigning any reason thereof decline to register a transfer
of any share whether fully paid or partly paid. The articles may also provide that
a member wanting to dispose of his holding should first offer them to the
existing shareholders at a price determined according to the articles. Only when
no existing member agrees to buy his holding, can the member sell them to an
outsider. This restriction is not applicable in case of a company incorporated as a
pure guarantee company.
b.
Limitation on the number of members: The number of members of a
private company is to be compulsorily limited by its articles to fifty. The
membership will be arrived at by considering joint holders as single member.
Also, present employees who are members and former employees who had
become members during their employment and continued to be members even
after they have ceased to be employees will be excluded.
According to Section 3(1)(iv) of The Companies Act, 1956, public company means a
company which
a.
b.
Has a minimum paid-up capital of five lakh rupees or such higher paidup capital, as may be prescribed.
c.
Is a private company which is a subsidiary of a company which is not a
private company.
d.
e.
ii.
iii.
iv.
v.
i.
ii.
Under Section 212, the holding company is under the obligation to attach the accounts
of the subsidiary with its own accounts though the holding company and its subsidiary
are incorporated companies, each having its own separate legal entity.
A subsidiary company cannot be a member of its holding company. However, if it was a
member before becoming a subsidiary, it shall not have voting rights at meetings of any
class of the holding company, unless it is holding the shares either as a legal
representative of a deceased member or as a trustee of a person. The subsidiary
company can continue to be a member, but by virtue of Subsection (1) cannot be
allotted any shares including rights or bonus. However, in the event of a scheme of
amalgamation it is permitted to buy the shares in its holding company.
7.13 OTHER CLASSIFICATION
Investment Companies
Section 372(10) of the Companies Act defines this type of company as a company
whose principal business is the acquisition of shares, stock, debentures or other
securities. Such type of companies buy shares and other instruments so that they can
be sold at a higher price at a later date or selling them with a view to buy at lower price.
The companies also earn dividend and interest on these instruments.
A company which carries on its business of manufacturing may invest subject to the
objects clause of the memorandum of association. All investments of such a company
are to be made in the companies own name.
Public Financial Institutions
Companies Act specifies that the following financial institutions shall be regarded as
public financial institutions:
Master of Finance & Control Copyright Amity university India
Page 142
Defunct Company
A defunct company means a company which never commenced business or which is
not carrying on business and has either no assets or has such assets as shall not be
sufficient to meet the costs of liquidation. However, a company is not considered as
defunct if the cessation of business is due to the conduct of winding up. Also, the
mere reduction of members below statutory minimum does not render a company
defunct.
Under Section 3(5) the existing public company which could not raise minimum
required capital after 14th December 2002 also treated as defunct company within
the meaning of Section 560.
Section 560 provides for the restoration of a companies name previously struck off the
register. However, the application must be made by the company, member or creditor to
the tribunal before the expiry of 20 years from the publication in the Official Gazette.
The effect of an order of restoration shall be that the company shall be deemed to have
continued in existence as if its name had not been struck off.
Closely Held Company
A public company which has raised capital only from the members, directors, relatives
and kith and kin of the promoters and not raised capital from the public.
Widely Held Company (A Listed Company)
A Public Company which has raised capital from the public by issue of prospectus and
its shares are dealt in two or more Stock Exchanges.
MULTIPLE CHOICE QUESTIONS:
Q1 The corporate veil of a company can be lifted
a) When revenue of the state is to be protected
b) To determine the character of an enemy company
c) When the company does not refund the application money on failure, to make
allotment
Master of Finance & Control Copyright Amity university India
Page 143
CHAPTER 8
REGISTRATION & INCORPORATION
After reading this lesson, you will be conversant with:
8.1 Promoters Of The Company
8.2 Procedure Of Incorporation
8.3 Memorandum Of Association
8.4 Articles Of Association
b.
Such a company is not registered under the Companies Act or any other
Indian Law;
c.
and
d.
Not to make either directly or indirectly any secret profits at the expense
of the company which he is promoting without the knowledge and consent of
the company. In case of any violation of this rule, the company can compel the
promoter to account for it.
ii.
Not to sell his property to the company at a profit unless all material
facts have been disclosed to an independent Board of Directors or to the
shareholders of the company and also in the prospectus. This disclosure relates
to the payments made in the last two years or to be made to the promoters. If a
He may sell his own property to the company for cash or against fully
paid shares in the company at an overvaluation after making full disclosure to an
independent Board of Directors or to the intended shareholders.
ii.
iii.
iv.
Type of a company.
Filing of the documents with the Registrar: (i) Memorandum of Association, (ii)
Articles of Association, (iii) List of Directors, (iv) Declaration stating that all
requirements of the Companies Act have been complied with, and (v) Preparation
of other Documents.
Each of the above aspects are dealt in detail in the following paragraphs.
Type of a Company
The promoters have a choice of deciding the type of company to be incorporated viz.,
public company and private company. Also, the company may be limited by shares or
guarantee or may be unlimited.
Name of the Company
The promoters have to first obtain the availability of name from the Registrar of
Companies (ROC) of the state in which the company is proposed to be incorporated.
Though a company may be incorporated with any name as desired by the promoter, the
company cannot be registered by a name, which in the opinion of the Central
Government, is undesirable. Section 20 lays down the following rules that have to be
followed while choosing the name.
i.
ii.
The intended name should not be identical, or resemble the name of the
company in existence and which has been previously registered. This restriction
also covers names of those companies under dissolution or which have been
dissolved and two years has not lapsed since such dissolution.
A name is said to resemble an already existing companies name if:
The proposed name differs from the name of an existing company
merely with an addition or subtraction of word like New, Modern, etc.
The proposed name is different from the name of the existing company
only to the extent of having the name of place within brackets before the word
limited.
iii.
iv.
The name should not imply association or connection with, or patronage
of a national hero or any person held in high esteem.
Master of Finance & Control Copyright Amity university India
Page 149
The name is not a general one and is not very common, like Cotton
Textile Mills Limited.
vii.
5 crore
1 crore
50 lakh
50 lakh
5 lakh
1 crore
10 lakh
ii.
iii.
The particulars of such directors whose names are given in the articles of
association as first directors.
iv.
A notice of the address of the registered office should be filed with the
Registrar. This however, can be filed within thirty days of incorporation (Form-18).
v.
A statutory declaration of compliance should be made in Form No.1 by
any of the persons specified for the purposes stating that all the rules and
requirements of the Companies Act have been complied with in respect of
registration and matters precedent and incidental thereto. The specified person
may be an advocate of Supreme Court or a High Court, or an Attorney or a
pleader entitled to appear before a High Court, or a Company Secretary or a
Chartered Accountant practicing in India and engaged in the formation of the
company or by a person named in the articles as a Director, Manager, or
Secretary of the company.
vi.
Every director has paid the amount due on the shares he has taken or
contracted to be taken by him. The director is liable to pay the same proportion
payable by the public on application and allotment of the shares,
iii.
iv.
A duly verified declaration by any one of the directors of the company
has been filed with the Registrar stating that all the conditions in (i), (ii), and
(iii) above have been fulfilled.
b.
Where the company has not issued a prospectus: Section 149(2) provides
that if a company does not issue a prospectus, it shall not commence any
business or exercise any borrowing powers, unless:
i.
A statement in lieu of the prospectus has been filed with the Registrar,
ii.
Every director has paid the amount due on the shares taken or contracted
to be taken by him, and
iii.
c.
Signed by each subscriber in the presence of at least one witness who
shall attest the signature and shall likewise add his address, description and
occupation.
Section 13 of the Act prescribes that the memorandum of association of a
limited company should essentially have the following six clauses:
Name Clause
The memorandum of association should contain the name of a company, whether it is a
private or public company. Companies covered by Section 25 are exempted from the
use of word(s) Ltd./Private Ltd.
The name of the company has to appear in full and in a legible manner on all documents
and official publications, letter papers, etc. Default in affixing or printing the correct
name on official documents can make the directors personally liable.
Registered Office Clause
This clause should state the name of the State in which the registered office of the
company will be situated. Under Section 146, a company shall, as from the date of
which it begins its business, or as from the 30th day after the date of its incorporation,
whichever is earlier, have a registered office; and a notice of the exact place of the
registered office must be given to Registrar within 30 days after the date of
incorporation.
Utmost care must be taken by the proposed company while opting this clause. The
location of Registered Office is crucial in the governance of the company since it is the
place where all the registers and documents are kept and Annual General Meetings are
held.
Change of registered office within a State (Section 17A)
No company shall change the place of its registered office from one place to another
within a state unless such change is confirmed by the Regional Director. To get
confirmation, the company shall make an application in the prescribed form to the
Regional Director. The Regional Director shall communicate the confirmation to the
company within four weeks from the date of receipt of the application. Then, the
company shall file, with the Registrar a certified copy of the confirmation by the
Regional Director for change of its registered office under this section, within two
months from the date of confirmation, along with a printed copy of the memorandum as
altered and the Registrar shall register the same and certify the registration under his
hand within one month from the date of filing of such document. The certificate shall be
the conclusive evidence that all the requirements of the Act with respect to the
alteration and confirmation have been complies with and henceforth the memorandum
as altered shall be the memorandum of the company.
Master of Finance & Control Copyright Amity university India
Page 154
This clause has to state the main objects to be pursued by the company
on its incorporation.
ii.
iii.
ii.
iii.
iv.
v.
vi.
ii.
Directors are personally liable for any diversion of the funds for
purposes other than what is specified in the companys memorandum. A
shareholder can bring about an action against the directors for restoration of
company funds used for ultra vires objects. They can also be held personally
liable for breach of warranty of authority.
iii.
In case the companys money has been spent ultra vires in purchasing
some property, the companys right over that property must be held secure as it
represents the companys funds. Hence, any property legally and by formal
transfer or conveyance transferred to a corporation, is in law, duly vested in such
corporation, even though the corporation was not empowered to acquire such
property.
iv.
The rule of ultra vires was devised for the protection of the companies
interest and it is not capable of being used against the companies interest.
Therefore, others cannot sue on the ground of ultra vires the claim of a company
which has matured. We will clarify this point with the help of a decided case. A
company purchased and operated a rice mill beyond its powers. The rice was
consigned to certain persons who had paid the price. The consignees had to sell
the rice, owing to its inferior quality, at a considerable loss. The company gave
them drafts promising to pay for the loss. The company went into liquidation
and the question about the enforceability of the drafts arose. The court held that
trading in rice was a transaction ultra vires to the company, the directors,
therefore, could not bind the company, and the consignees could not recover.
Liability Clause
The fourth clause states the nature of liability that the members incur. If the company is
incorporated with limited liability, the clause must state that the liability of the
members shall be limited by shares. This means that no member can be called upon to
pay anything more than the nominal value of the shares held by him. If the company is
limited by guarantee, this clause shall state the amount which every member undertakes
to contribute to the assets of the company in the event of its winding up.
Master of Finance & Control Copyright Amity university India
Page 156
8.4ARTICLES OF ASSOCIATION
The articles usually contain the provisions relating to the following matters:
i.
ii.
Lien on shares.
iii.
Calls on shares.
iv.
Transfer of shares.
v.
Transmission of shares.
vi.
Forfeiture of shares.
vii.
Surrender of shares.
viii.
ix.
Buy-back of Securities.
x.
Share warrants.
xi.
xii.
xiii.
xiv.
Directors, including first directors or directors for life, their appointment,
remuneration, qualification, powers and proceedings of board of directors
meetings.
xv.
xvi.
xvii.
Borrowing powers.
xviii.
Winding up.
CHAPTER 9
SHARE & SHARE CAPITAL
After reading this lesson, you will be conversant with:
9.1 Types Of Share Capital
9.2 Preference Shares
9.3 Equity Or Ordinary Shares
Master of Finance & Control Copyright Amity university India
Page 161
According to Section 2(46) of the Companies Act, a share means share in the share
capital of a company, and includes stock except where distinction between stock and
shares is expressed or implied. By a share in a company it also means a right to
participate in the profits made by a company, while it is a going concern and declares
dividend, and in the assets of the company when it is wound up.
9.1 TYPES OF SHARE CAPITAL
As per Section 85 of the Companies Act, 1956, the share capital of the company limited
by shares formed after the commencement of this Act shall be of two kinds: Preference
shares and Equity shares.
According to section 86 of the Companies Act, 1956, the new issues of share capital of
a company limited by shares shall be of two kinds only, namely: a.
i.
ii.
b.
preference share capital.
9.2 PREFERENCE SHARES
Section 85(1) of the Act describes a preference share as one which satisfies the following
criteria:
ii.
iii.
iv.
Fully or partly convertible preference shares are the shares which are converted
into ordinary shares at the some time in future on prescribed conditions and
terms.
Voting Rights for Preference Shareholders
Every member of a company limited by shares and holding any preference share capital
therein shall, in respect of such capital, have a right to vote only on resolutions placed
before the company, which directly affect the rights, attached to his preference shares.
In other words, any resolution for winding up the company or for the repayment or
reduction of its share capital shall be deemed directly to affect the rights attached to
preference shares.
ii.
iii.
ii.
a pre-issue net worth of not less than Rupees One crore in three out of
preceding five years, with the minimum net worth to be met during immediately
preceding two years.
iii.
9.10 ALLOTMENT
Allotment of shares by the company to successful allottees is an important aspect in
process of raising the share capital. Provisions relating to allotment contained in SEBI
guidelines and Company Law have to be complied with.
ii.
1,50,000
1,50,000 x 1/3
50,000
iii. Number of the shares to be allotted to the successful allottees will be arrived at on a
proportionate basis i.e. total number of shares applied for by each applicant in that
category multiplied by the inverse of the oversubscription ratio. (Please see Example)
100
100 x 1/3= 33
Illustration
The applicants are applying for 500 shares. These applicants are entitled on
proportionate basis to be allotted 40,000 shares at 200 shares per applicant. However,
the number of shares allocated to that category on proportionate basis is only 33,300.
The deficit of 6,700 shares will be taken from the surplus available in category 4. In
that category as against total number of 30000 shares to be allotted the actual shares
allocated on proportionate basis is 40,000 shares leaving the surplus of 10,000 shares.
After adding 6,700 shares to the category no. 5. the balance of 3,300 shares will be
added back to the category no.1 which comprises of the applicants applying for
minimum number of shares. As a result number of successful allottees in that category
will increase by 33 nos. from 500 to 533.
Example
Master of Finance & Control Copyright Amity university India
Page 171
3 times
S.
no.
No. of No. of
shares
applic
applied
ants
for
Category
(Categor
y wise)
Total no.
of shares
applied
by each
applicant
(2x3)
Proportio
nate
allocatio
n to each
category
(onethird)
Number
of shares
allotted
per
applicant
by
rounding
off
No. of
success
ful
applica
nts
Total
no. of
shares
allotted
(6x7)
100
1,500
1,50,000
50,000
+3,300*
100
500
+33*
50,000
+3,300
200
400
80,000
26,700
100
267
26,700
300
300
90,000
30,000
100
300
30,000
400
300
1,20,000
40,000
100
300
30,000
500
200
1,00,000
33,300
200
200
40,000
600
100
60,000
20,000
200
100
20,000
6,00,000
2,00,000
2,00,000
b.
Writing off preliminary expenses and any commission or discount
allowed on issue of securities
c.
Providing for premium payable on redemption of preference securities or
debentures of the company.
d.
The premium raised is not available for payment of dividend as it is not profit. If a
company distributes the amount lying in the account for purposes other than those
stated above, it shall amount to reduction in capital and provisions of Section 100 shall
apply. The law also requires that a company should transfer the amount of securities
premium (whether received in cash or in kind) to a separate account called the Security
Premium Account.
ii.
iii.
iv.
Power must be used in Good Faith: The power to forfeit shares should
be exercised in good faith and in the best interests of the company. The
forfeiture cannot be done at the request of the shareholder to relieve him of
shares.
v.
Liability towards Unpaid Calls: The liability of the original
shareholder may remain towards the unpaid calls for a period of three years
from the date of forfeiture, if the articles so provide. Such a shareholder may
also be put on the B list in the event of the company going in for liquidation
within one year of his membership.
The board may be empowered to cancel the forfeiture if the shareholder approaches the
board requesting the same and is willing to give the amount due with interest.
Master of Finance & Control Copyright Amity university India
Page 178
CHAPTER 10
PROSPECTUS
Master of Finance & Control Copyright Amity university India
Page 181
General Information
i.
ii.
iv.
v.
vi.
Date of closing of the issue including the date of earliest closing of issue.
vii.
viii.
Whether rating from CRISIL or any rating agency has been obtained for the
proposed debentures/preference shares issue.
ix.
x.
Names and addresses of the underwriters and the amount underwritten by them
together with declaration by the Board of directors that the underwriters have
sufficient resources to meet their respective obligations.
xi.
Consent of the Central Government about the present issue as also particulars of
letter of intent/industrial license making clear in the statement that the Central
Government does not undertake any responsibility for financial soundness or
correctness of the statement.
xii.
xiii.
Names and addresses of trustees of the debenture trust deed, in case of issue of
debentures.
xiv.
The Issuer Company may include in the offer document, the financial statements
prepared on the basis of more than one accounting standards (Ex: Indian and US
GAAP)
b.
Size of present issue giving separately reservation for preferential
allotment to promoters and others.
c.
i.
Paid-up capital
After the present issue
History, main objects and present business of the company, as also name
and address of subsidiary, if any,
ii.
iii.
iv.
Collaboration, if any, with details of any performance guarantee or
assistance in marketing,
v.
vi.
Stock market data of shares including the high/low price for the last three years
and monthly high/low during the last six months, if applicable,
vii.
viii.
ix.
x.
xi.
Details about the expected capacity utilization during the first three years of
commercial production and the year as to when the company will start earning
profits.
Company and Management
Particulars in regard to the company and other listed companies under the same
management, which made any capital issue during the last three years. The particulars
shall include:
i.
ii.
Year of issue
iii.
iv.
Amount of issue
v.
vii.
viii.
Outstanding Litigations
a.
Outstanding litigations, if any, relating to matters that affect the
operations and finances of the company including tax liabilities (of any nature)
disputes.
b.
Any criminal prosecution against the company and its directors for
alleged offences under the provisions stated in paragraph I of Part I of Schedule
XIII to the Companies Act, 1956.
c.
Particulars of default, if any, such as arrears of dividend, and default in
meeting statutory dues, etc.
d.
Any material alterations after the date of the latest balance sheet and its
impact on the companies performance and prospectus of the company.
Experts Opinion
Section 57 allows mention of a statement by an expert provided such expert has
never been associated with the company before the public issue. Section 58 makes it
mandatory for the company to seek written consent of an expert to include his
statement in the prospectus. By consenting to the issue of the prospectus the expert
does not undertake the liability in respect of anything in the prospectus except his
own statement. Contravention of the provisions of both the sections shall be
punishable with fine which may extend to fifty thousand rupees.
However, an expert will not be held liable in respect of any wrong report or
valuation made by him in the prospectus if he can prove that
a.
He withdrew his consent before the prospectus was delivered to the
Registrar for registration.
b.
After registration but before any allotment could be made, on becoming
aware of the untrue statement, he withdrew his consent and gave a public notice
to that effect.
c.
He had every ground to believe that the statement made by him was true.
A prospectus once registered should be issued within 90 days. This ensures that
the prospectus does not contain outdated information, and
Shelf Prospectus
Master of Finance & Control Copyright Amity university India
Page 186
d.
Every person (including an expert) who has authorized the issue of the
prospectus.
The misrepresentation should relate to a material fact. Where it is represented that
something will happen or be done in future, this does not amount to a representation of
fact. It is only an estimate or a forecast. Hence, there should be a misstatement relating
to an existing fact. In Bentley vs. Black it was held that a calculation of future profits is
not a representation of fact.
The Act provides certain defenses to the persons named u/s 62. Such persons shall not
be held liable where it can be proved that:
a.
A director had withdrawn his consent before the issue of the prospectus
and the same was published without his authority or consent,
b.
A person named as a director on becoming aware gives a public notice to
the effect that his name is included without his knowledge/consent,
c.
A director after the issue of prospectus but before allotment on becoming
aware of any untrue statement contained in the prospectus, withdraws his
consent giving reasonable public notice,
d.
A director had reasonable ground to believe and did up to the time of
allotment believe the statement to be true; In Derry vs. Peek the directors of a
tramway company issued a prospectus stating that its carriages could be moved
by steam power with consent of the Board of Trade. The Act incorporating the
company provided for such permission to be sought by the company. However,
on refusal by the Board, the company was wound up. In this case the directors
were not held liable as they honestly believed that the statements made in the
prospectus were true,
e.
A director relied on the statement made by a competent expert or it was a
fair representation of a public document.
CHAPTER 11
MEETINGS
After reading this lesson, you will be conversant with:
11.1 Procedure and Requisites of Valid Meeting
11.2 Kinds of Meetings
In this lesson, we shall discuss the provisions relating to meetings of the members,
directors and creditors.
11.1 PROCEDURE AND REQUISITES OF VALID MEETING
Meeting Should be called by Proper Authority
Every company meeting has to be called by the directors except in the case when the
meeting has, in the event of default by the directors, been called by the requisitionists
or by the Central Government. The directors have to fix the date, time and place of the
meeting. Notice of a meeting given by the Secretary without the sanction of the Board
of Directors is invalid, but such a notice may be ratified by the directors before the
meeting.
Shareholders are also empowered u/s 169 to requisition holding an extraordinary
general meeting subject to compliance of the provisions of the said section.
Central Government is also empowered to call for a general meeting other than an
annual general meeting.
Section 167 empowers the Central Government to call for an annual general meeting
in case of default in holding the meeting in accordance with Section 166.
Master of Finance & Control Copyright Amity university India
Page 192
if all the shares are held by one person, the single shareholder shall
constitute a valid quorum in case of a general meeting;
ii.
where the Company Law Board directs under Section 167 or Section 186
that one member present in person or by proxy shall constitute quorum.
Meeting to be Properly Conducted
Proper conduct of the meeting means that proper rules for ascertaining the sense of the
meeting, the rules for discussion and order in debate as must be observed. Voting rights
cannot be given to preference shareholders unless the resolution directly affects the
rights attached to the preference shares held by them.
Proxy (Section 176): A member who is entitled to attend and vote at a meeting can
appoint another person (whether a member or not) to vote on his behalf. A person so
appointed is a proxy. A proxy has no right to participate in the discussions in the
meeting. However, he may demand or join in a demand for a poll.
Section 176(1) will not be applicable in the following cases except if the articles
provide otherwise.
a.
Members of a company having no share capital will not be able to
attend and vote by proxy.
b.
A member of a private company cannot appoint more than one proxy to
attend the same meeting.
c.
A proxy may vote only on a poll. This implies that he is not eligible to
vote by show of hands
Resolutions: A proposal made at a meeting by any member is called as Motion. A
motion when passed is called resolution. Motions may relate to closure of discussion or
postponement of the discussion.
With respect to general body meetings, there are two kinds of resolutions-ordinary
resolutions and special resolutions. As per Section 189 (1), a motion passed by simple
majority of the members voting at a general meeting is said to have been passed by an
ordinary resolution. An ordinary resolution is a simple majority resolution which
requires that votes cast in favor of the resolution should be more than votes cast against
the resolution. Also, the notice as per the provisions of the Companies Act must have
been duly given specifying the intention to propose the resolution as a special
resolution.
According to Section 189 (2), a resolution is a special resolution when
i.
the notice required under the Act has been duly given of the general
meeting; and
iii.
the votes cast in favor of the resolution by members present (in person or
in proxy either by poll or by show of hand, as applicable) are not less than three
times the number of votes, if any, cast against the resolution. Abstentions, if any,
are not to be taken into account.
Shareholders Meetings:
a.
Board Meetings.
b.
c.
d.
Meetings of Creditors.
Statutory Meeting
Section 165 of the Companies Act, 1956 lays down:
Every company limited by shares, and every company limited by guarantee and having
a share capital, shall, within a period of not less than one month nor more than six
months from the date at which the company is entitled to commence business hold a
general meeting of the members of the company, which shall be called statutory
Master of Finance & Control Copyright Amity university India
Page 196
ii.
iii.
iv.
a public company having liability of its members limited by guarantee
and not having share capital; and
v.
a Government company, whether registered as a private company or a
public company.
However, if a private company becomes or converts itself into a public company
within a period of six months from the date of its incorporation, it will have to comply
with the provision of this section. If a private company becomes public company after
six months of its incorporation, it will not be required to hold the statutory meeting.
Purpose: The main purpose of this meeting is to enable the members to know at any
early date the financial position and prospects of the company. Also, the statutory
meeting provides an opportunity to the shareholders to discuss various aspects arising
out of the promotion and formation of the company.
Annual General Meeting
An annual meeting known as an annual general meeting is required to be held by every
company every year whether public or private, limited by shares or by guarantee, with
or without share capital or an unlimited company. Every annual general meeting shall
be held during business hours, not on a public holiday and at the registered office or at
some place within the city, town or village in which the registered office is situated.
Purpose: The object of the meeting is to allow shareholders to periodically review the
working of the company. It also provides a forum for the shareholders to exercise their
discretion in electing/re-electing new or retiring directors/auditors, and in having a
direct interaction with the members of the board regarding the progress made by the
company, and on matters relating to accounts or affairs of the company.
Time frame: According to Section 166(1), the first annual general meeting of a
company should be held within a period of 18 months from the date of its
incorporation. The period of 18 months will not be extended in any case. When a
meeting is so held, it will not be necessary for a company to hold any annual general
meeting in the year of its incorporation or in the following year.
Master of Finance & Control Copyright Amity university India
Page 197
Class Meetings
Class meetings are those meetings which are held by holders of a particular class of
shares, e.g. preference shares. Need for such meetings arises when it is proposed to vary
the rights of a particular class of shares. Thus, for effecting such changes, it is necessary
that a separate meeting of the holders of that particular class is held. The meeting is
necessary only if the variation involves the curtailments of the rights of any classes of
shareholders.
It was held in House of Fraser v. ACGEE Investments Ltd.(1987) that a cancellation of
preference shares by repayment of the capital paid upon those shares and in accordance
with rights attached to those shares does not involve any modification or variation of
class rights so as to require a meeting of the preference shareholders.
Section 107 gives a right to a minority group of shareholders belonging to a class, not
being holders of less than ten percent of the issued shares of that class, to challenge the
variation of the rights attached to the shares of that class. That is, a class meeting
should be called if variation of the class of shares in question would unfairly prejudice
the shareholders of that class.
Master of Finance & Control Copyright Amity university India
Page 199
Board Meetings
The meetings of the Board of the Directors for the purpose of collectively taking
decisions for smooth functioning of the company are referred as Board Meetings.
Object: To formulate management policies, take decisions of importance pertaining to
running of the company, review of progress made by the company among other matters
related to the company.
Section 291 lays down that the Board can exercise all the powers which the company is
authorized to exercise.
However, where it is specifically provided that a power or act should be exercised by
the company in a general meeting, the board shall not exercise such power.
Moreover, the board shall not exercise any power or do any act which is inconsistent
with the provisions of the Act, or the Memorandum or the Articles of the company.
Section 291(2) provides that a regulation passed by the company in a general meeting
shall not invalidate any prior act of the board which would have been valid if that
regulation had not been made.
The power delegated to the Board of Directors will have to be exercised at properly
convened board meeting unless the articles provide otherwise.
Powers: Section 292 lays down that the following decisions have to be taken only at the
meeting of the board of directors:
i.
ii.
to issue debentures;
iii.
iv.
v.
to make loans.
It has to be noted that the meeting does not require any agenda for the meeting of the
directors. Any business whatsoever, thus can be transacted at a board meeting.
Frequency of Board Meetings: Section 285 provides that a board meeting should be
held at least once in every 3 calendar months. There should be at least four such
meetings in every year. This provision is applicable to every company except where the
Central Government notifies otherwise.
Master of Finance & Control Copyright Amity university India
Page 200
Place and Time of Board Meetings: There is no restriction as to the place at which the
board meeting should be held. Thus a board meeting need not be held at the registered
office of the company. It can be held at any place according to the convenience of the
board. It may also be held in a foreign country if circumstances warrant.
A board meeting may be held on any day (even a public holiday) or outside business
hours. However, according to Section 288, a board meeting adjourned for want of
quorum should be held on a day which is not a public holiday.
Notice of Meeting: A written notice of the board meeting should be sent to every
director for the time being in India and to his usual address in case of every other
director. The notice should be issued under the authority of the company.
An officer who fails to give such a notice will be punishable with fine which may
extend to rupees one thousand.
Any such failure to give notice will render the proceedings of the meeting invalid.
Quorum: The quorum for a board meeting shall be 1/3 of its total strength (any fraction
contained in that 1/3 being rounded off as one) or 2 directors whichever is higher.
Where the number of interested directors equals or exceeds 2/3 of the total strength,
then the remaining non-interested directors present at the meeting and being not less
than 2 in number will be the quorum during such time.
At a board meeting, presence of quorum is required at each and every stage of the
meeting.
In a situation, where all the directors are interested, it is advised to increase the number
of directors who are not interested or appoint additional directors not interested in the
contract, if authorized by the articles.
If this is not practicable, the proposed contract should be placed before the general
meeting for consent.
Master of Finance & Control Copyright Amity university India
Page 201
per Section 217 of the Companies Act, 1956 the Boards report is to be adopted
AGM
Board meetings
Extra ordinary meetings
Class meetings
CHAPTER 12
DIRECTORS
After reading this lesson, you will be conversant with:
On incorporation, a company becomes a legal entity. Being a legal entity, it conducts its
business with the help of representatives chosen by the shareholders. These
representatives are termed as directors. Section 2(13) defines a director as including
any person occupying the position of a director by whatever name called. In order to
determine if a person is a director or not, it is important to see if that person is
appointed and authorized by the articles to act on behalf of the company. It should be
noted that a person who performs all the functions of a director, but who is not duly
appointed as one cannot be considered as a director.
12.1 POSITION OF DIRECTORS
As a Trustee
A director of the company occupies a position of a trustee in relation to the company.
As a trustee, he should exercise his powers for the benefit of the company and its
shareholders. The fiduciary position of a director, makes it imperative on his part to
strictly follow the provisions of the articles and to exercise his power in a prudent
manner.
As Agents
The relationship between the company and its directors can also be construed as one of
principal and agent. When the directors act on behalf of the company, the company is
liable for all the acts performed within the authority of the directors. However, the
directors will be personally liable for any acts performed in excess of their authority.
They will also be held personally liable when they
b.
c.
When it is not clear as to who is signing the contract (that is, whether the
principal or the agent).
As Managing Partners
As they are entrusted with the responsibility of managing the affairs of the company,
their position can be likened to that of managing partners.
Qualification Shares
A director will have to take up qualification shares only if required by the articles of
association. According to Section 270, if the articles require a director to take up
qualification shares, then such a person to be eligible to act as a director must acquire
such qualification shares within two months of his appointment as director. On the
expiry of two months, he automatically vacates his office if he has failed to acquire
these shares. The nominal value of the qualification shares shall not exceed Rs.5,000 or
the nominal value of one share where it exceeds Rs.5,000. Also share warrants will not
count for purposes of share qualification. Section 270(2) specifies that any provision in
the articles requiring a person to obtain qualification shares before his appointment as
director or within a period shorter than two months of his appointment shall be void.
In a situation where a director is unable to take up qualification shares, because the
company has not issued a prospectus to the public or where a statement in lieu of
prospectus has not been filed with the Registrar within two months of the directors
appointment, it was held that shares cannot be allotted to the director in contravention
of Section 70.
The qualification shares to be taken up by the directors can be purchased from the open
market or from a friend and not necessarily from the company.
12.2 DISQUALIFICATIONS OF A DIRECTOR
Section 274 of the Companies Act, 1956 provides that the following persons shall not
be capable of being appointed as directors of any company:
a.
A person found by a competent court to be of unsound mind and such
finding remaining in force,
b.
An undischarged insolvent,
e.
A person who has not paid any call in respect of shares of the company
held by him, whether alone or jointly with others and six months have elapsed
from the last date fixed for the payment of the call,
f.
A person who has been disqualified by a court in pursuance of Section
203, which empowers the court to restrain fraudulent persons from managing
companies, unless the leave of court has been obtained for his appointment,
g.
a.
Has not filed the annual accounts and annual returns for any continuous
three financial years commencing on and after the 1st day of April, 1999, or
b.
Has failed to repay its deposit or interest thereon on due date or redeem
its debentures on due date or pay dividend and such failure continuous for one
year or more.
Acts Done by Director Prior to Disqualification Valid
Section 290 of the Act specifies that acts done by a person as a 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 this Act or in the Articles. However, acts done by a director after his
appointment if shown to be invalid can be reversed. Also, any acts ultra vires the
company and such other acts where the third party was aware of the irregularity, shall
not be entitled to be enforced against the company.
12.3 RESTRICTIONS ON NUMBER OF DIRECTORSHIPS
Section 275 limits the number of companies in which an individual can hold
directorship to fifteen. Where a person holding directorships in more than fifteen
companies, is appointed as director of another company, such appointment shall take
effect only if the director relinquishes within fifteen days in his office as director from
one of the companies in which he already was a director. Where he fails to do so, the
new appointment shall be void from the expiry of the said fifteen days. Section 277(2)
lays down that where the number of directorships held by a person is fourteen or less
and after the commencement of the Act he is appointed as a director of other
companies, he will have an option to choose the directorships he wishes to continue. He
Master of Finance & Control Copyright Amity university India
Page 207
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, that is to
say, a director who is only qualified to act as such during the absence or
incapacity of some other director.
Section 279 levies a penalty of fifty thousand rupees in respect of each of these
companies after the first fifteen, if any person holds office, or acts as a director of more
than fifteen companies in contravention of the foregoing provisions.
12.4 NUMBER OF DIRECTORS
Section 252 of the Companies Act lays down that a public limited company shall have
at least three directors.
Companies other than a public limited company should have at least two directors.
However, a public company having, (a) a paid-up capital of 5 crore or more, (b) one
thousand or more small shareholders may have a director elected by such small
shareholders in the manner as may be prescribed. Here, small shareholders means a
shareholders holding shares of nominal value of Rs.20,000 or less in the public
company.
However, the articles of the company usually fix the maximum and minimum number
of directors for the company. For ascertaining the maximum number of directors for
purpose of determining whether the number has crossed the limit as stated in the
Articles or not, the following are not taken into account:
a.
Directors appointed by the Central Government under Section 408 of the
Act or by the Company Law Board under Section 397 or 398 of the Act,
b.
Where the maximum permissible number as fixed by the articles is already more
than 12, then only an ordinary resolution is required to increase the number
within the permissible limits fixed by the articles. However, where the increase
is beyond that permissible by the articles of association, then the Central
c.
The power to borrow money otherwise than on debentures. However, a
banking company can borrow from other banking companies or from the
Reserve Bank of India, the State Bank of India or any other banks established by
or under any Act.
d. The power to invest funds of the company. This power shall however be subject
to the provisions of Sections 293 and 372.
e. The power to make loans. Again this power is subject to the provisions
contained
in
Sections
295
and
370.
The decisions mentioned in (c), (d) and (e) may be delegated to any committee
of directors, managing director, the manager or any other principal officer of the
company or in the case of a branch office of the company, a principal officer of
its branch by a resolution passed at a meeting.
f. The power of filling casual vacancies in the Board.
g. Sanctioning of a contract in which a director is interested.
h. The power to recommend the rate of dividend to be declared by the company at
the Annual General Meeting, subject to the approval by the shareholders.
i. The power to appoint a person, a managing director or manager who is holding
either office in another company.
Master of Finance & Control Copyright Amity university India
Page 210
c.
d.
e.
Third parties.
ii.
c.
d.
He is adjudged an insolvent,
e.
He is convicted by a Court of any offense involving moral turpitude and
sentenced in respect thereof to imprisonment for not less than six months,
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.
12.12 RESIGNATION BY THE DIRECTORS
A director may resign from the office in the manner prescribed in the articles. The
Companies Act does not mention anything relating to the resignation of his office by a
director. If there is no provision in the articles regarding the resignation of the director,
the director may resign by giving reasonable time to the company. In absence of any
provision in the articles, a resignation once made will take effect immediately when the
intention to resign is made clear. Where a director is elected or has contracted to act for
a fixed period, his resignation, before the expiration of the period, may make him liable
for damages for breach of his contract, unless the articles permit such resignation, or
unless there is a good cause.
Where of the two directors, one died and the other wanted to resign, it was held that a
letter of resignation left at the office of the company under intimation to Registrar of
Companies was enough to make the resignation effective and it was not necessary that
the surviving director should first co-opt a director in exercise of power of co-option
under the articles and then hand over the resignation to him. [S.S. Lakshmana Pillai vs.
ROC (1977)]
The directors do not have the power to refuse the resignation of co-director unless such
a provision is contained in the Articles of Association of the company.
12.13 Removal of Directors
Master of Finance & Control Copyright Amity university India
Page 216
b.
If the Central Government is of the opinion that the director possesses
the requisite qualification for practice of the profession. [Section 309(1)]
The explanation for Section 198 mentions that remuneration includes:
Master of Finance & Control Copyright Amity university India
Page 217
Rs.40,000
Rs.57,000
Rs.72,000
Rs.87,500
Shall be less than 10% of net profit for the financial year
Can not exceed 11% of gross profits for the financial year
Can not exceed 11% of net profits for financial year
Can exceed 11% but not 15% of gross profit
CHAPTER-13
WINDING UP
After reading this lesson, you will be conversant with:
13.1 Winding Up By NCLT
13.2 Voluntary Winding Up
A company comes into existence upon incorporation and continues to exist till it is
amalgamated with another or wound up. Prof. Gower in his book The Principles of
Modern Company Law defines winding up of a company as the process whereby its
life is ended and its property administered for the benefit of its creditors and members.
An administrator, called a 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.
Winding up precedes dissolution. Till a company is dissolved, its corporate status and
powers continue.
Section 425 of the Act provides for three modes of winding up:
iii.
Losses
It is indeed just and equitable ground that a company be wound up where it is unable
to carry on business except at loss and there is no hope for making trading profit.
iv.
Oppression of Minority
It is a just and equitable ground for winding up, where the majority shareholders adopt
an aggressive attitude towards the minority shareholders.
Instances where dividends have not been paid, shareholders meetings have not been
held, attempt is made for squeezing out the minority shareholders by buying out their
shares at an under value or where majority of the shareholders wish to dissociate
Master of Finance & Control Copyright Amity university India
Page 223
v.
Fraudulent Purpose
Where a company has been incorporated for carrying on any fraudulent or illegal
business or one of its objects is illegal, then it is a just and equitable ground for winding
up.
vi. Incorporated or Quasi-Partnership
Where it is proved that a private company is nothing but an extension of a partnership
and there is abuse of power or breach of good faith, it is a ground for winding up under
just and equitable clause.
In American Pioneer Leather Co. Re., winding up was ordered when one of the
three members of a private company offered his interest for purchase and the other
members refused. In accordance, the member was entitled to petition for winding
up. The company was wound when the other two members refused to buy his
interest.
vii.
Public Interest
A company may also be wound-up by the NCLT, if the winding up would be in public
interest.
We have seen the circumstances in which the NCLT can order winding up. We shall
now get down to discussing the procedural aspects of winding up.
Who Can Apply for Winding up (Section 439)
An application to the NCLT for winding up of a company shall be by petition and can
be made by the following:
i. The Company [Section 439 (1)(a)]
A company may, at a meeting of its shareholders, pass a special resolution, to the
effect that the company shall be wound up. Where a valid resolution is passed by
the company, the courts may accept the same and pass orders for winding up of a
company.
ii.
By any creditor of the company including a contingent or a prospective
creditor [Section 439(1)(b)]
The term creditor means a creditor to whom money is owed by the company either
immediately or at a later date by virtue of an agreement entered into by the creditor
Master of Finance & Control Copyright Amity university India
Page 224
According to Section 428, the term contributory means every person liable to
contribute to the assets of a company in the event of its being wound up, and includes
the holder of any shares which are fully paid up; and for the purposes of all proceedings
for determining, and all proceedings prior to the final determination of the persons who
are to be deemed contributories; and includes any person alleged to be a contributory.
iv.
As per this subsection, all or any of the parties specified in clauses (a), (b) and (c) can
petition either jointly or separately.
v.
The powers of the Registrar to petition for winding up are linked with Section 433. A
Registrar can petition under clause (b), (c), (d), (e) and (f) of Section 433. However,
while petitioning under clause (e) of Section 433 relating to inability of the company to
pay its debts, the Registrar can do so only if, it appears to him either from the financial
condition of the company as disclosed in its balance sheet or from the report of a
special auditor appointed under Section 233-A or an inspector appointed under Section
235/237 that the company is unable to pay its debts. The Registrar shall obtain the prior
approval of the Central Government to present a petition on any of the grounds
aforesaid. The Central Government shall not accord its sanction, unless the company
has first been afforded an opportunity of making its representations, if any.
vi.
Where based on the report furnished by an inspector under Section 235 or 237 (b) (i)
and (ii), the Central Government decides to petition for winding up, it may do so under
Section 243. Clause (f) of Section 439 enables the person authorized by the Central
Government to petition on its behalf.
vii.
Where a resolution has been passed for voluntary winding up, before
presentation of the petition, winding up shall be deemed to have commenced at
the time of the passing of the resolution;
ii.
CONSEQUENCES OF WINDING UP
The winding up order made by the NCLT should be communicated to the Official
Liquidator and the Registrar (Section 444). On such an order being made, the official
liquidator becomes the liquidator of the company (Section 449). The Board of Directors
of the company will cease to hold office from the date of communication of the winding
up order. They will be directors only for the purpose of submitting the statement of
affairs of the company to the liquidator.
It may be noted that a winding up order will be construed as notice of discharge to the
officers and employees of the company, except when the business of the company is
continued.
Where a person has entered into a contract of service for a fixed term, and the said term
has not expired on the date the winding up order is made, then such a person can claim
damages for the resulting breach of contract.
Statement of Affairs (Section 454)
Where a winding up order has been made by the NCLT and where the official liquidator
has been appointed as the provisional liquidator, unless the NCLT otherwise orders, a
statement of affairs in the prescribed form and verified by an affidavit should be
submitted to the official liquidator.
The statement of affairs should give the following particulars:
a. the assets of the company, stating separately the cash balance in hand and at the
bank, if any, and the negotiable securities, if any, held by the company.
b. its debts and liabilities.
e.
To raise on the security of the assets of the company any money
requisite;
f.
To do all such other things as may be necessary for winding up the
affairs of the company and distributing its assets
ii.
iii.
iv.
Every Official Liquidator shall, in such manner and at such times as may
be prescribed, pay the moneys received by him as liquidator of any company,
into the public account of India in the Reserve Bank of India [Section 552]. The
Official Liquidator or any other liquidator of a company shall not pay any
moneys received by him in his capacity as such into any private banking
account [Section 554].
v.
The liquidator shall pay the dividends payable to any creditor which had
remained unpaid for six months after the date on which they were declared
and the assets refundable to any contributory which have remained undistributed
for six months after the date on which they become refundable, into the public
account of India in the Reserve Bank of India in a separate account to be
known as the Companies Liquidation Account [Section 555(1)].
vi.
The Liquidator
The liquidator shall submit the accounts for inspection to the Committee
of Inspection [Section 465(2)].
ix.
x.
Dissolution of Company (Section 481)
Where the affairs of the company are wound up or where the NCLT is of the opinion
that the liquidator cannot proceed with the winding up due to lack of funds and assets or
for any other reason whatsoever and further where the NCLT feels it is just and
equitable to do so, it may make an order that the company be dissolved from the date of
the order and the company shall be dissolved accordingly.
13.2 VOLUNTARY WINDING UP
Section 484 to 520 deal with voluntary winding up of a company. A company may be
voluntarily wound up either by passing an ordinary resolution or a special resolution.
a. A company may pass an ordinary resolution in a general meeting requiring the
company to be wound up voluntarily when the period, if any, fixed for the duration
of the company by its articles, has expired, or the event if any, has occurred, on the
occurrence of which the articles provide that the company should be dissolved.
[Section 484(1)(a)]
b. Under [Section 484(1)(b)], the company may also be wound up voluntarily by
passing a special resolution. This is when the members want to wind up the
company voluntarily, inspite of the company being solvent.
A voluntary winding up does not mean that the existence of the company comes to an
end. The company continues to exist until it is dissolved. The directors will continue to
Master of Finance & Control Copyright Amity university India
Page 229
The assets of the company are to be applied for payment of its debts and liabilities.
Subject to the provision of Sections 520 and 530 (relating to preferential payments), the
debts and liabilities of the company should first be paid in full, and if that is not possible,
then settled on pari passu basis. Surplus if any, unless otherwise provided for in the
articles, should be distributed among the members in accordance with their rights and
interests in the company.
ii.
Provisions under Section 454 apply to this section, except that the company is required to
submit the statement of affairs to the liquidator and not to the Tribunal.
iii.
The powers are synonymous with the powers of an official liquidator in a winding up
by Tribunal. In addition, the liquidator is empowered:
The NCLT may suo moto or on an application by any creditor or contributory or the
Registrar appoint or remove a liquidator. Where an Official Liquidator is appointed as
liquidator under Section 502(2), the remuneration payable to him shall be fixed by the
Tribunal and credited to Central Government.
v.
An arrangement entered between the creditors and a company about to be, or in the
course of its winding up, is binding upon the parties if:
All costs, charges, expenses and remuneration of the liquidator shall, subject to the
rights of secured creditors, if any, be paid out of the assets of the company in priority to
all other claims.
CHAPTER-14
CONSUMER PROTECTION ACT, 1986
After reading this lesson, you will be conversant with:
14.1 Introduction
14.2 Object of the Consumer Protection Act, 1986
14.3 Extend and Coverage of the Act:14.4 Definitions of Important Terms
14.5 Who is a consumer?
14.6 Who can file a Complaint?
14.7 Structure
14.8 What Constitutes a Complaint?
14.9 Where to file a complaint
14.10 State Commission
14.11 National Commission
14.12 How to File a Complaint
14.13 Relief Available to the Consumers
14.14 Procedure for filing the appeal :14.15 Speedy Disposal
14.1 INTRODUCTION
The earlier principle of Caveat Emptor or let the buyer beware which was prevalent has given
way to the principle of Consumer is King. The origins of this principle lie in the fact that in
todays mass production economy where there is little contact between the producer and consumer,
often sellers make exaggerated claims and advertisements, which they do not intend to fulfill. This
leaves the consumer in a difficult position with very few avenues for redressal. The onset on intense
competition also made producers aware of the benefits of customer satisfaction and hence by and
large, the principle of consumer is king is now accepted. The need to recognize and enforce the
rights of consumers is being understood and several laws have been made for this purpose. In India,
we have the Indian Contract Act, the Sale of Goods Act, the Dangerous Drugs Act, the Agricultural
Produce (Grading and Marketing) Act, the Indian Standards Institution (Certification Marks) Act,
the Prevention of Food Adulteration Act, the Standards of Weights and Measures Act, the Trade and
Merchandise Marks Act, etc which to some extent protect consumer interests.
However, these laws required the consumer to initiate action by way of a civil suit, which involved
lengthy legal process proving, to be too expensive and time consuming for lay consumers. Therefore,
ANSWER KEY
CHAPTER 1
Q1 (d) Q2 (a) Q3 (d) Q4 (d) Q5 (b) Q6 (a) Q7 (a) Q8 (c) Q9 (d) Q10 (b)
CHAPTER 2
Q1 (a), Q2 (b), Q3 (d), Q4 (c). Q5 (b) Q6 (a) Q7 (a) Q8 (b) Q9 (a)
CHAPTER 3
1 (a), Q2 (d), Q3 (b), Q4 (a). Q5 (c) Q6 (d) Q7 (d) Q8 (a) Q9 (c) Q10 (c)
CHAPTER 4
1 (d), 2 (d), Q3 (b), Q4 (d). Q5 (c) Q6 (d) Q7 (b) Q8 (b) Q9 (d) Q10 (c)
CHAPTER 5
Q1 (d), Q2 (a), Q3 (b), Q4 (a), Q5 (a), Q6 (d), Q 7 (d), Q8 (a), Q9 (c ), Q10 (b)
CHAPTER 6
Q1 (d), Q2 (b), Q3 (d), Q4 (a), Q5 (b), Q6 (C), Q7 (c), Q8 (d), Q9 (d), Q10 (a)
CHAPTER 7
Q1 (d), Q2 (b), Q3 (c), Q4 (c), Q5 (d), Q6 (d), Q7 (d), Q8 (b), Q9 (a), Q10 (a)
CHAPTER 8
Q1 (b), Q2 (c), Q3 (d), Q4 (d), Q5 (d), Q6 (d), Q7 (b), Q8 (b), Q9 (d), Q10 (a)
CHAPTER 9
Q1 (a) Q2 (d) Q3 (c) Q4 (b) Q5 (b) Q6 (c) Q7 (d) Q8 (d) Q9 (c) Q10 (d)
CHAPTER 10
Q1 (d) Q2 (d) Q3 (d) Q4 (d) Q5 (d) Q6 (d) Q7 (d) Q8 (b) Q9 (d) Q10 (b)
CHAPTER 11
Q1 (a), Q 2 (a) Q3 (d) Q4 (a) Q5 (b) Q6 (d) Q7 (d) Q 8 (d) Q9 (c) Q10 (a)
CHAPTER 12
Q1 (d) Q2 (c) Q 3 (c) Q4 (b) Q5 (c) Q6 (c) Q7 (d) Q8 (b) Q9 (c) Q10 (c)
CHAPTER 13
Master of Finance & Control Copyright Amity university India
Page 249
BIBLIOGRAPHY
subject Name:
DETAILS
Five subjective questions
Three subjective questions + case study
40 objective questions
MARKS
15
15
10
Assignment B
Assignment C
Q2 (d)
Q8 (b)
Q14 (d)
Q20 (d)
Q26 (a)
Q32 (b)
Q38 (c)
Q3 (a)
Q9 (a)
Q15 (e)
Q21 (e)
Q27 (d)
Q33 (c)
Q39 (b)
Q4 (b)
Q10 (c)
Q16 (a)
Q22 (c)
Q28 (c)
Q34 (d)
Q40 (c)
Q5 (e)
Q11 (a)
Q17 (b)
Q23 (d)
Q29 (a)
Q35 (c)
Q6 (c)
Q12 (c)
Q18 (d)
Q24 (a)
Q30 (d)
Q36 (d)