I am a Businessperson.

Do I Need to Know
the Law?
 Ignorance of law is no excuse

 How does law impact business?

 Before producing the Pinto, Ford crash-tested various
prototypes, in part to learn whether they met a safety standard
proposed by the National Highway Traffic Safety Administration
(NHTSA) to reduce fires from traffic collisions.

 In 1970 Ford crash-tested the Pinto itself, and the result was the
same: ruptured gas tanks and dangerous leaks. The only Pintos
to pass the test had been modified in some way–for example,
with a rubber bladder in the gas tank or a piece of steel
between the tank and the rear bumper.
 Source: Moral Issues in Business 8th ed. Shaw & Barry
 Between 1971 and 1978, approximately fifty lawsuits were
brought against Ford in connection with rear-end accidents in
the Pinto.

 In the Richard Grimshaw case, in addition to awarding over $3

million in compensatory damages to the victims of a Pinto
crash, the jury awarded a landmark $125 million in punitive
damages against Ford. The judge reduced punitive damages to
3.5 million.

 Source: Moral Issues in Business 8th ed. Shaw & Barry

 “The Act has provisions for product liability action on account of
harm caused to consumers due to a defective product or deficiency
in services.

 Personal injury, death or property damage could lead to product

liability claims

 False and misleading ads at first instance would attract a two-year

jail term and a fine up to ₹10 lakh, which would go up to five years
and ₹50 lakh for every subsequent offence.”

(Source: Business Line )

 “GM cars using gas powered engines require coolant to prevent
overheating in the summer and freezing up in the winter.

 A lawsuit against General Motors stated the coolant in vehicle

engines contained a dangerous chemical.

 GM had to pay out around $20 billion for its 25 million customers.
Each person ended up receiving from $400 to $800.” (Source:
Reuters, March 2008)
 How the change in consumer law impact business?

 What role managers can play in tackling the change in the

consumer law?

 Should managers and business follow ethical perspectives in

addition to legal requirements?

 Nestle Maggie issue – this happened before the product
liability claim coming into picture

 Social media influencers- Financial influencers could be fined

$133,000 for dud tips, regulator warns (Australian media)

 „Bharat Biotech to pay compensation if Covaxin causes side

effects‟ – Businessline
 Constance Bagley:

 Managers should identify and anticipate legal changes from

business perspective

 Managers should strive to ensure that no compliance failures occur

 Do you agree with this point/view?

 Government is evolving regulations in various emerging
business models
 E-commerce
 E-pharmacy sector
 App based taxi services

 Managers would have to play major role in anticipating legal

changes
 Draft E-Commerce Policy- Key recommendations
deep discounts to be regulated, certain type of flash
sale to be regulated

 Recent social media rules and OTT platform rules

 Law provides framework for entering into contract and
organizing business

 Company

 Partnership

 Limited Liability Partnership

 How can an important commercial information be protected by
the company?
 Business is primarily regulated through

 Legislation

 Decisions of Court/Interpretation of Court

 Legislation
 Indian Contract Act,1872
 Companies Act, 2013
 Limited Liability Partnership (LLP) Act 2008
 IPR law- Patent, Trademark , Copyright
 Consumer Protection Act,1986
 Competition Act,2002
 Example/Situation: You attend a job interview of a reputed

company

 The company selects you, offers a job and provides an

employment agreement

 You sign the employment agreement

 What does employment agreement contain? Is it a contract?

 Contract- Agreement enforceable by law

 Employment agreement is a contract

• Example/Situation: Husband promised to take his wife for a vacation

to Singapore, but later refused.

• Agreement between brothers regarding division of the family

business

• Are these contracts?

 Social agreements are not enforceable by contract law

 Contract law is primarily dealing with commercial/business

agreements

 Hence 1st example- Not within the realm of contract law

 Hence 2nd example- Within the realm of contract law

 Mc-Donald want to enter into a new country for business

 They want to ensure that they get the best supply of vegetable
and meat

 Can McDonald use contract as a tool for achieving this?

 • Exclusive dealing agreements
Mc- with vegetable and meat
Donald‟s- vendors
leveraging
• Incentivised the farmers by
advantage giving technical know-how to
through produce and store high quality
products
contract
 A founder member of the team allege that there was a contract
regarding allotment of shares

 Paytm refutes stating that it is just a letter of intent and no

definite contract was entered into place.

 What parameter law uses to understand this situation?

 For forming a contract, parties should have intention to

create binding legal relationship

 Courts usually presumes that people want to enter into

legally binding agreement.

 Force Motors Ltd entered into a non-binding term
sheet with Rolls-Royce Power Systems to form an
Indian Joint Venture for producing engines
Bringing some certainty to months of discussions,
Softbank-backed e-commerce firm Snapdeal has
finally agreed to a non-binding letter of intent (LoI)
for a merger with rival Flipkart, according to a
source privy to the development.
 Non-binding agreement provide flexibility to business

 To continue the agreement

 No unwanted legal dispute and cost

 Test compatibility with the business partner and market condition

 Agreement = Offer + Acceptance

 Offer, acceptance and consideration are essential for a

contract

 Example: Gayatri offers to sell her luxury flat for Rs. 2 crore
to Hema. Hema agrees to buy it
 Contract are agreements enforceable by law

 Intention of parties to enter into binding agreement is

necessary

 Contract law is primarily dealing with commercial agreements

 Agreement = Offer + Acceptance

 As business managers when you want to enter into non-binding

agreement please mention it specifically.

 Offer and acceptance should be clear from the contract.

 Ravi calls the toll free number of Jumbo Pizza and asks for 1

Cheese Burst Pizza for Rs.500/-.

 Jumbo Pizza employee confirm 1 Cheese Burst Pizza for Rs.

500/-

 When pizza was delivered Ravi denied to collect and pay for it
 Jumbo Pizza mentions that the recorded telephone
conversation is a contract. Is it correct?
 Contracts formed through spoken offers and acceptances, are

as valid as contracts formed through a written offer and

acceptance.
Points to Ponder

 Which are the contracts relevant for start-ups?

 Which are the contracts relevant for JV?

 Which are other contracts usually used by corporate organizations?

 “Comprehensive contracts for CEOs become the new norm” - Times

of India
 Trimex International v. Vedanata (SC)
 Trimex submitted a commercial offer through e-mail for the supply
of Bauxite to the Vedanta.

 After several exchanges of e-mails and after agreeing on the

material terms of the contract, the respondent conveyed their
acceptance of the offer through e-mail

 Information Technology Act also allows contracts to be formed over

internet
• Ex. Sharukh bought a mobile phone on
Flipkart

• Is this contract?

• Who are the parties to the contract?

 “The Website is a platform that Users utilize
to meet and interact with one another for
their transactions. Flipkart is not and cannot
be a party to or control in any manner any
transaction between the Website's Users.”
 “Hence forward: All commercial/contractual terms are
offered by and agreed to between Buyers and Sellers
alone.
 The commercial/contractual terms include without
limitation price, shipping costs, payment methods,
payment terms, date, period and mode of delivery,
warranties related to products and services and after
sales services related to products and services.
 Flipkart does not have any control or does
not determine or advise or in any way involve itself in
the offering or acceptance of such
commercial/contractual terms between the Buyers and
Sellers.”
 E- commerce transaction are also contracts

 Flipkart is just a platform for transactions between buyers and

sellers (as per Flipkart terms and condition)

 Contract is between Sharukh and the seller selling on Flipkart

 Are all e-commerce website platforms?

 Does it mean that Flipkart have no contractual obligation?

 “The rules have also introduced the concept of “fall-back
liability”, which says that e-commerce firms will be held liable in
case a seller on their platform fails to deliver goods or services
due to negligent conduct, which causes loss to the customer.
 In several cases, when problems arise with goods purchased from
their marketplaces, e-commerce platforms direct the consumers
to the respective sellers to solve any grievance. With fall-back
liability, consumers will be able to reach out to the platform
itself”.
 Example: Sachin walks into LIC office and expresses interest in

joining an insurance policy

 The officer pulls out a 10 page long policy agreement and asks

Sachin to sign on it

 Sachin states that he want to change the policy agreement

 The contract terms are already written by the LIC and officer said it

can‟t be changed-„Take it or leave it‟ contracts

 Provides convenience to business organisations

 Reduce burden of negotiating and forming a new contract for

each customer

 Prevalent in all form of business/commercial activities

 BK Ltd. sent important original documents relating to an export

consignment to a party in Germany with DHL.

 Only the original documents would have enabled the party in

receiving the consignment.

 DHL lost the courier, causing losses to BK Ltd.

 BK Ltd. was demanding the actual losses suffered by them.

 DHL made all its customers sign a standard form containing a term

that limited the liability of the DHL in the event of loss of courier to
Rs.1000

 Are standard form contract and limited liability clause

enforceable?

 Are limited liability clauses significant for business?

 Court held: A person who signed a document containing contract

and terms is normally bound by them even though he has not

read them, and even though he is ignorant of their precise legal
effect

 Standard form contract and limited liability clauses are usually

enforceable
 Standard contracts are criticised for being only advantageous

for business organisations- One sided contracts

 What about consumer‟s interest?

“A typical contract for the purchase of house from a developer is so
one-sided as to be a joke, except that the joke is on you, when you are
the home-buyer.

Take some typical clauses. If the buyer delays an instalment by fifteen

days, he pays a penal interest at the rate of 18% per annum; but when
a builder delays on his promise by a year, he rarely pays more than
1% per annum on the buyer payments! And these payments could
well amount to a lifetime savings of an average professional.”
(Dealing with one-sided contracts, ET 2008)
 Are standard form contract a business necessity?

 Should consumer interest be incorporated in standard

contracts? If yes, how?
Govt wants to clamp down on one-sided contracts
“Soon, your telecom operator, bank or real estate developer may not
be able to get away with one-sided contracts. Government officials
said discussions are on to bring in transparent rules on unfair
contracts. Under the present laws, the contracts are unilateral and
there is no protection against unfair contracts”
 Unfair contract is defined to include –
 requiring manifestly excessive security deposit
 refusing to accept early repayment of debts on payment of
applicable penalty;
 imposing on the consumer any unreasonable charge, obligation
or condition which puts such consumer to disadvantage
 Real Estate Regulatory Authority-

 A default on the possession timeline by JNC Construction

prompted the Uttar Pradesh RERA authority to order a refund
with 24 percent interest and a compensation of Rs 2.5 lakh for
mental distress

 RERA can strike down the one sided clauses

 Insurance Regulatory and Development Authority- Mandatory
grace period of 15 days to cancel the insurance contract to be
provided by all insurance companies - Free look period

 SEBI

 TRAI
 The terms of a signed contract bind the parties to the contract

even if they have not read the terms or are not aware of them.

 Standard Form Contracts are pre-printed forms containing the

terms on which a corporation does business with its customers.

 Y entered into an agreement with X for betting on a cricket

match

 X entered into an agreement with Y for influencing and in case

needed bribing for business needs

 Are these agreements valid contract?

 Sports betting is not legal in India

 Bribing is illegal
 Agreement entered into by a minor (below 18 )is not a valid

contract
 What happens if a minor attempts to buy a product online?

 How can e-commerce companies deal with this issue?

 Flipkart Membership Eligibility:
 “Use of the Website is available only to persons who can form
legally binding contracts under Indian Contract Act, 1872. Persons
who are "incompetent to contract" within the meaning of the
Indian Contract Act, 1872 including minors, un-discharged
insolvents etc. are not eligible to use the Website.
 “If you are a minor i.e. under the age of 18 years, you shall not
register as a User of the Flipkart website and shall not transact on
or use the website. As a minor if you wish to use or transact on
website, such use or transaction may be made by your legal
guardian or parents on the Website”
 “Flipkart reserves the right to terminate your membership and /
or refuse to provide you with access to the Website if it is brought
to Flipkart's notice or if it is discovered that you are under the age
of 18 years.”
 Example: Mahajan took a policy with the LIC. Despite his

treatment by a doctor for serious ailments just a year back, he

made a false statement in the policy to the effect that he had
not been treated by any doctor

 Insurance agreement affected by fraud

 What are the important clauses in a
standard business contract document?
 Preamble
 Interpretation & definitions
 Scope & specifications
 Price
 Timelines for performance
 Terms of payment
 Price variation
 Taxes & duties
 Force majeure
 Defaults & liquidated damages
 Inspection & acceptance
 Warranty
 Patents, copyrights (IPR clauses)
 Indemnities
 Spares
 Termination
 Resolution of disputes
 Confidentiality
 Survival
 Amendments
 Applicable Laws
 Effective Date
 Notices
 Contract Signatures
 Example/ Situation

 Tata-Docomo Dispute: Tata expressed inability to buy back

DoCoMo‟s 26 per cent share in the joint venture (JV) as per the JV
Agreement

 Failure of Tata to perform the term in the JV Agreement led to

dispute

 $ 1.18 billion damage to be paid to Docomo

 In case of breach of contract terms parties can claim for
Damages

 Damages- The suffering party‟s right to compensation

 Example: A company was to supply power to its contractor for a

construction job.

 The company failed to provide it. The contractor hired a

generator set.

 It cost the contractor 2 lakhs. The contractor is claiming the

money from the company.

 Can the contractor claim damages?

 Can the contractor claim the entire additional expense

incurred as damages?

 Is damages limited to Business to Business contracts?

 Based on loss suffered by the innocent party

 Additional expenses incurred- Rs. 2 lakh in this case

 Loss of profit-Profit which the contract would have gained

 Damages could be claimed in both Business to Business (B2B) and

Business to Consumer (B2C) contracts

 Example/ Situation

 Tata-Docomo Dispute: Tata expressed inability to buy back

DoCoMo‟s 26 per cent share in the joint venture (JV) as per the JV
Agreement

 Failure of Tata to perform the term in the JV Agreement led to

dispute

 $ 1.18 billion damage to be paid to Docomo

 In case of breach of contract terms parties can claim for
Damages

 Damages- The suffering party‟s right to compensation

 Example: A company was to supply power to its contractor for a

construction job.

 The company failed to provide it. The contractor hired a

generator set.

 It cost the contractor 2 lakhs. The contractor is claiming the

money from the company.

 Can the contractor claim damages?

 Can the contractor claim the entire additional expense

incurred as damages?

 Is damages limited to Business to Business contracts?

 Based on loss suffered by the innocent party

 Additional expenses incurred- Rs. 2 lakh in this case

 Loss of profit-Profit which the contract would have gained

 Damages could be claimed in both Business to Business (B2B) and

Business to Consumer (B2C) contracts

 Example/Situation: Mega Builders Ltd entered into a contract with

Great Steel Ltd to procure steel required for construction

 Great Steel Ltd is to provide steel by 15th December, 2017

 As per the contract, if Great Steel Ltd fails to do so, they have to pay

damages of Rs. 5 lakh per day

 Eg. Pizza within 30 minutes

 Pre-determined amount for damages to be paid is mentioned

in the contract
 What is the benefit of pre-determining the damages to be
paid?
 Avoid dispute and court proceedings

 Clarity on the amount to be paid

 Caps the maximum damage to be paid in case of default

 “In the event of the CONTRACTOR‟s failure to submit the Bonds,
Guarantees and Documents, supply the stores/services and
conduct trials, installation of equipment, training, etc as specified in
this contract, the BARC may, at his discretion, withhold any payment
until the completion of the contract.

 The BARC may also deduct from the CONTRACTOR as agreed,

liquidated damages to the sum of 0.5% of the contract price of the
delayed/undelivered stores/services mentioned above for every
week of delay or part of a week, subject to the maximum value of
the Liquidated Damages being not higher than 5% of the value of
delayed stores/services.”
 Example/Situation: Great Steel Ltd was supposed to provide
10,000 kg of steel to Best Infrastructure Ltd by 1st October, 2017

 Due to heavy flooding and cyclone the Great Steel is not in a

position to honour the contractual obligation

 Great Steel Ltd informed Best Infrastructure that flooding and

cyclone are events beyond their control
 Force Majeure- Impossibility of performance of contract due to

situation beyond the control of the parties

 Releases both the parties from contractual obligation

 Also referred to „Act of God‟

 Is riot, act of terrorism a force majeure event?

 Force Majeure- Impossibility of performance of contract due to

situation beyond the control of the parties/unforeseen event

 Releases both the parties from contractual obligation

 Also referred to „Act of God‟

 What events should a Force Majeure clause include?

Force majeure and terrorism
 The unfortunate new reality post 9/11 and 26/11 is that terrorism is a
very real threat and may unfortunately no longer be considered as an
unforeseen possibility, thereby making it more difficult for parties to
claim Force Majeure. This needs to be considered by parties entering
into agreements.
 Thus, contracting parties may now consider amending standard force
majeure provisions by including “acts of terrorism” as an enumerated
Force Majeure event
 Example/Situation: Great Steel Ltd was supposed to provide
10,000 kg of steel to Best Infrastructure Ltd by 1st October, 2017
 Due to heavy flooding and cyclone the Great Steel is not in a
position to honour the contractual obligation
 Great Steel Ltd informed Best Infrastructure that flooding and
cyclone are events beyond their control
 Force Majeure- Impossibility of performance of contract due to

unforeseen event/ situation beyond the control of the parties

 Releases both the parties from contractual obligation

 Also referred to as „Act of God‟

 What events should a Force Majeure clause include?

 A joint venture was formed in India between HY Cars of South
Korea and MH Cars of India.

 Pursuant to the JV Agreement, both HY Cars and MH Cars invested

around Rs.100 crore each into the joint venture

 Recently, HY Cars informed MH Cars that they would like to pull

out of the JV for reason of force majeure as their business in South

Korea is affected by war.
 Force majeure events should be defined in the contract

 In case force majeure events are not defined, it could lead to

legal dispute
 “India‟s Reliance Industries has declared force majeure on
gasoline exports from its Jamnagar site
 The force majeure follows an unspecified issue at a gasoline-
producing plant
 Force majeure is typically declared when matters deemed
beyond a refinery‟s control disrupt supplies, allowing it to void
some of its contractual obligations to customers.”
Force majeure and terrorism
 The unfortunate new reality post 9/11 and 26/11 is that terrorism is a
very real threat and may unfortunately no longer be considered as an
unforeseen possibility, thereby making it more difficult for parties to
claim Force Majeure. This needs to be considered by parties entering
into agreements.
 Thus, contracting parties may now consider amending standard force
majeure provisions by including “acts of terrorism” as an enumerated
Force Majeure event
 Agent- is any person entrusted to do certain action

on behalf of the principal

 Example: Agent of an insurance company

 Principal could be held contractually liable for acts of

agent in case of principal-agent relationship

 Example/Situation: „Baby Care‟ is a business
organisation in the field of day care for infants and
toddlers

 Baby Care followed a franchisee model of business

 Kozhikode franchisee of Baby Care refused to return

Rs.1 lakh caution deposit received from the parents

 Parents are claiming „Baby Care‟ to be responsible

 Baby Care states it is franchisee‟s fault

 Does principal agent relationship exist between

Baby care and their Kozhikode franchisee?

 If the franchisee is given the authority to enter into

contracts with third parties on behalf of the

franchisor, the relationship could be a principal-
agent contract
 Example/Situation: A life insurance company agent collected

premium from the customer

 He failed to pay the amount to life insurance company

 Customer is claiming that life insurance company is responsible for

agents action

 Life insurance company have a clause in their agent contract

stating that agents are not supposed to collect premium payment

on behalf of the company
 If authority to act is exceeding the principal-agent contract the

principal cannot be held liable

 Can the life insurance company be held liable?

 Recent Tata Motors v Antonio Paulo (SC 2021)
 A car which was used a test drive vehicle sold to the customer
by the dealer
Whether based on principal-agent concept Tata Motors would
be responsible?
SC verdict: Since in this specific situation Tata Motors and dealer
was acting as principal-principal basis no liability ensues
TM did not authorize the dealer to represent them. They had a
normal contract to supply cars. Dealer was solely responsible.
 Indemnity contract – A contract to cover the losses suffered by

another

 Example: Insurance contract

 Can indemnity clauses be used in standard form contracts?

 Example:Indemnity clause mentioned in MyJio App Terms and

Conditions :

 “Indemnity: You agree to indemnify us and other persons involved in

the creation of this Application for all damages, losses and costs
(including legal costs) which arise out of or relate to your use of this
Application. This indemnification includes, without limitation, liability
relating to copyright infringement, defamation, invasion of privacy,
trade mark infringement and breaches of this Application Terms”.
 Tata motor‟s had insisted on indemnity clause in the lease
agreement while taking Singur land on lease from West
Bengal government

 The indemnity clause binds the state to compensate Tata

Motors in case of any loss or harm arising out of the contract
 The indemnity clause includes loss suffered due to relocation,

overall loss and capital expenditure of the company

(Source: http://indianexpress.com/article/kolkata/state-should-
honour-singur-indemnity-clause-tatas-in-hc/)
Does indemnity clause have relevance in the following
contracts?

 Franchisee Contract,

 Principal- Agent Contract

 Joint Venture Contract,

 Government contract
Session – V
EPGP
2022-23
HISTORY OF CORPORATE LAW
LEGISLATIONS
⚫ 1932 – Indian Partnership Act
⚫ 1956 – Companies Act
⚫ 1969 – Monopolies and Restrictive Trade Practices Act
⚫ 1991 – New Industrial Policy of India
⚫ 1995 – India became a member state of World trade
Organisation
⚫ 2002 – Competition Act
⚫ 2008 – Limited Liability Partnership
⚫ 2013 – Companies Act (Amended)
⚫ 2016 – Insolvency and Bankruptcy Code
Various Business Organisations
 (i) Partnership Firm
 (ii) Limited Liability Partnership
 (iii) Company
 (iv) Sole Proprietorship

 PARTNERSHIP FIRM:
 an association of persons with a defined
mechanism of sharing of profits among the
partners

 Hybrid form of principal-agent relationship

Choice of Entity
Choice of the entity is generally determined by
these factors:
(i) Taxation
(ii) Liability
(iii) Raising Investment
(iv) Separate Legal Entity
(v) Perpetual Succession

Maximum number of partners:

Banking Business – maximum 10
Any other business – maximum 20
Sharing P&L
 Instance:
 Partnership deed contained different shares for
partners – profits were divided according to partner’s
respective shares – Dispute arose on sharing of losses

 How to assess and divide losses when it is not

mentioned in the partnership deed?

 Equally or In proportion to partner’s shares??

Solution
 In ordinary mercantile partnerships, where
there is a community of profits in a definite
proportion, the losses also must be in such
proportion
Relationship of Partners
 Right to take part in the conduct of the business
 Differences to be settled through majority
 Not entitled to receive remuneration from
conducting business
 Share profits and loss equally

Mutual Agency:
Person carrying on business acts not only for himself but
for others also. Partners share principal – agent
relationship.
Property of Partnership
 Partners may bring in capital and other immovable
property – “Property of the firm”
 New properties also could be acquired for conducting
business
 Partnership is not a distinct person, hence cannot own
property
 Property of the firm should be used only for business
Explanation
 Upon dissolution, transferring partner is entitled to
receive share of assets

 Outgoing partner/ Deceased Partner:

- surviving/continuing partners when carry out business
without final settlement of the assets of firm

- Said partners/their legal representative is entitled to

 Either share of profits in accordance with his share of
property
 Or
 @ 6% per annum on amount of his share in the property of
firm
Relationship with Third Party &
Doctrine of Implied Authority
Mutual Agency – every partner is an agent of the
other

Partners are jointly and severally liable for

every act of the firm

Scope of Implied Authority

 an act of partner which is done to carry on business
of the firm in usual way will bind the firm – Doctrine
of Implied Authority
Limits to Implied Authority
 (1) submit a dispute to arbitration
 (2) open bank account on behalf of firm in his name
 (3) compromise/relinquish any claim
 (4) withdraw a suit/legal proceedings filed on behalf of
firm
 (5) admit any liability in suit against firm
 (6) acquire immovable property on behalf of firm
 (7) transfer immovable property of firm in his name
 (8) enter into partnership on behalf of his firm.
Registration of firm – Procedure

Filing an application with Registrar in

prescribed form with prescribed fee
(i) Name of firm
(ii) Address/Principal place of business
(iii) Names and Addresses of partners
(iv) Date when each partner joined the firm
(v) Duration of the firm
(vi) Date of creation
Contd..
 Authorizes State Govt. to appoint
Registrar of Firms for the purpose
of registration of partnership firms

 Such forms should be duly signed

by each and every partner of the
firm, if not his name must be
dropped as partner
Non-registered firm

1.A partner cannot file a suit against the firm or any

partner, for enforcing a contractual right

2.No suit can be filed against any third party for the
purpose of enforcing a contractual right.
Limited Liability Partnership (LLP)
Limited Liability Partnership Act, 2008

Combination of advantages of both the Company

and Partnership
An alternative to the traditional partnership firm
with unlimited liability.
LLP – Nature
Salient Features of LLP Act:
1)It is a body corporate – legal entity separate from its
partners
2)Minimum 2 persons – for any lawful business by
signing the incorporation document and getting
registered with the Registrar
3)Rights and obligations of Partners - Agreement or else
First Schedule of the Act
4)Partnership firm will be liable to the full extent of its
assets.
5)Partner liable to the extent of his contributions.
Contd..
6) Partners are not agents of co-partners and hence will not
be liable for unauthorized acts or misconducts of
other partners.

7) Atleast two individuals shall be partners – 1 must be

resident of India

6) A firm, private company or unlisted public company are

to be allowed to convert into LLP

6) An LLP may be wound up voluntarily or by the Tribunal

to be established under the companies.
 Incorporation of LLP
Incorporation Document
(i) 2/more persons associated for carrying on a lawful
business with a view to profit have to subscribe
their names to an incorporation document
(ii) This document to be filed with Registrar of State in
which the registered office of the LLP is to be stated
(iii) statement stating compliance with requirements of
and rules to be submitted
Liability of LLP & its Partners
 Partner is agent of LLP and not of co-partners
 Liable only to the extent of partners wrongful
act/omission done in the course of LLP business
 No personal liability except for wrongful act or
omission on partner’s part.
 Unlimited liability in case of fraud: when an act
is carried out by LLP or any of its partners with
intent to defraud LLP creditors or any person or for
any fraudulent purposes.
 Waiver of Penalty by court/Tribunal – has
provided useful information during investigation
Accounts
 LLP shall maintain annual accounts.

 Audit of the accounts is required only if the

contribution exceeds Rs. 25 lakh or annual turnover
exceeds Rs. 40 lakh.

 A statement of accounts and solvency shall be filed by

every LLP with the Registrar of Companies (ROC)
every year.
SESSION - VI
EPGP
2022-23
Queries
 Can one person form a company?

 When does a company come into existence? What would

be the name of the company?

 Can a company contract in its own name?

 Can a company buy a building in its own name?

 Who are the members of a company?

An introduction to company
law
Companies Act, 1956 was amended in 2013 and 2015.

 S. 2 (20) of the Act defines it as a company

incorporated under this Act or under any previous
company law [Section 2(20)].

 A company is a “legal person” or “legal entity” separate

from, and capable of surviving beyond the lives of its
members.
Companies
Paid Minimum & Other Observations
Up Maximum Number of
capital Persons
Public None Minimum 7 to Any subsidiary of public
Company unlimited company shall be treated as
public company even if such
subsidiary company has obtained
the status of a private company
in its articles

Private None 2 - 200 Right to transfer its shares is

Company restricted

One None One Member Can be considered as Private

Person Company
Company
Subsidiary company - Section
2(87)
 In relation to holding company, means a company in which
the holding company—
(i) controls the composition of the Board of Directors;
OR
(ii) exercises or controls more than one-half of the
total share capital either at its own or together with
one or more of its subsidiary companies:

 Provided that such class or classes of holding companies as

may be prescribed shall not have layers of subsidiaries
beyond such numbers as may be prescribed.
Example
 Subsidiary companies of the Tata Group and joint
ventures using 'TATA' in their names include:
 Tata AIG — an insurance based joint-venture company
with American International Group.
 Tata AutoComp Systems - India's leading automotive
components conglomerate
 Tata Capital — a wholly owned subsidiary of Tata
Sons Limited, the apex holding company of the Tata Group.
 Tata Consultancy Services — Asia's largest IT company and
world's largest software and services company
Associate company – Section 2 (6)
 Associate Company:

 If holding company has:

(1) atleast 20% of the total share capital of the later ;
OR
(2) having influence over the later's decision making
process under and agreement
OR
(3) Both are Joint venture companies

Example: DAFPPL
Example – Company Profile of DAFFPL

 Delhi Aviation Fuel Facility Pvt. Ltd. (DAFFPL) is an SPV

promoted by Indian Oil Corporation Ltd.

 IOCL, 37%, Bharat Petroleum Corporation Ltd., 37%, and

Delhi International Airport Pvt. Ltd., 26% stakes
respectively

 To develop and maintain the aviation fuel facilities at

Terminal 3 (T3), cargo terminal and the earlier Terminal 2
(T2) at the Indira Gandhi International Airport at Delhi.
The concession has been granted by DIAL to the SPV for a
period of 25 years starting from July 28, 2010, when T3
became operational.
Public and Private Co.
Private company and Public Company:

(i) Restriction of transferring Shares

(ii)Limits number of its members to 200

(i) Cannot invite the public to subscribe for its capital or

shares of debentures. It has to make its own private
arrangement.
Characteristic Features of
Company
(i) Independent Corporate Existence

 Instance:
 A profitable leather & shoe manufacturing business
was converted into a company. Salomon, his wife &
five children subscribe to one share each. Authorized
capital £ 40000 and business valued at £39,000 & sold
his leather business to company which pays £9,000 in
cash & allots shares worth £ 20,000.,
Contd..
 Salomon loaned the remaining £ 10,000 through
secured debentures. Company took an unsecured
loan of £ 10,000 from another person and
thereafter company falls on hard times. It had to
be liquidated to meet demands of the creditors
and total assets were not sufficient.

House of Lords decided that being an independent

corporate entity Salomon had to be paid first
 Contd..
(ii) Limited Liability
(iii) Perpetual Succession: “An incorporated company
never dies”
(iv) Transferable Shares
(v) Separate property
(vi) Common seal : It is the official signature of the
company. The purpose of the seal is to furnish
evidence regarding authenticity of a document.
Changed as per Companies Act, 2013
(vii)Can sue or be sued in its corporate name
(viii)Attracts professional management
Corporate Personality
 A company is a legal person but not a citizen either
under the Constitution of India, 1950 or the
Citizenship Act, 1955.

 A Company acquires a nationality & a residence

based on its country of incorporation.
Incorporation of Companies
 Memorandum of Association &

 Articles of Association plus other documents

 Submit to Registrar of Companies

 Certificate of Incorporation leads to birth of a

Company
Memorandum of Association
(MoA)

 It is the constitution or charter of the company

and contains the powers of the company and
consists of five clauses.
 Fundamental conditions upon which alone
the company is allowed to be incorporated.
 Regulates external affairs of the Company with
outsiders.
Contents of MoA
(i) NAME CLAUSE
(ii) REGISTERED OFFICE CLAUSE
(iii) OBJECTS CLAUSE:
The 2013 Amendment does not require classification as main
objects and so on.
{a) Main objects, (b) and objects ancillary to main objects b)
Other objects}
(iv) LIABILITY CLAUSE : limited by shares or by
guarantee
(v) CAPITAL CLAUSE : amount of share capital the
company is permitted to raise.
Doctrines of Ultra Vires
The object clause has two-fold operation –
(i) field of industry to which the corporate
activities will be confined, and
(ii) negatively determines that nothing shall be
done beyond that field.

An act outside the objects is ultra vires the company,

that is, beyond the powers of the company.

Doctrine of ultra vires has been developed to protect

the investors and creditors of the company.
Example
Ashbury Railway Carriage & Iron Company v. Riche
(1875)
 Instance:
 The objects of this company, as stated in the MoA,
were to supply and sell the materials required to
construct railways. The contract here was to finance
construction of a railway.

 Result ? Ultra Vires or not?

Articles of Association
 Second important document to be registered alongwith the MoA.
 AoA contains details of functioning of company such as internal
regulations, bye-laws which contain regulations pertaining to
management of the company.

The articles of association usually contain provisions relating to:

(1) Specifying the business of the company
(2) Different classes of shares and the rights of shareholders, Allotment of
shares, Transfer and transmission of shares
(3) Borrowing powers
(4) Holding of Meetings
(5) Number and power of directors
(6) Dividends
(7) Audit and Accounts
Doctrine of Constructive Notice
 MoA and AoA being registered with the Registrar
of Companies (ROC) becomes public documents.
 Open to public inspection
 Every outsider dealing with the company is
deemed to have notice of the contents of the
MoA and AoA.
 This is known as constructive notice of the MoA &
AoA.
 Protects company against outsiders
Doctrine of Indoor Management

 Reverse of doctrine of constructive notice

 Outsiders may not be aware of internal

matters dealt by executives

 Internal irregularities cannot lead to set

aside a contract dealing with the company

 Protects outsiders against the company

 Royal British Bank v Turquand

 Doctrine of Indoor Management
 The directors of a coal mining and railway
company borrowed money from the Royal British
Bank, on a bond of £ 2,000.

 The bond was given under the seal of the

company and was signed by two directors and a
secretary.

 Company claimed that under its clauses of

incorporation, the directors had power to
borrow only such sums as had been
authorized by a general resolution of the
company.
Contd..
 In this case, no sufficiently specific resolution had
been passed.

 Remedy for an outsider such as Royal British

Bank?

 Doctrine of Indoor Management, hence they are

entitled to the loan amount borrowed by the
Company.
 Exceptions - Doctrine Of Indoor
Management

If outsider had:
(i) Knowledge of irregularity
(ii) Suspicion of Irregularity:
A person contracting with company is not protected by
“Turquand Rule” if the circumstances are suspicious.
Person holding Directorship of two companies pays
debts from company to another. It demands inquiry per
se.
(iii) Forgery
(iv) Connivance
Alteration of MoA and AoA
MoA:
 Special resolution (Except raising authorised share capital)
 Name Clause: Such special resolution is forwarded to
Central Govt., to seek its approval.
 Object Clause: passed Special resolution is submitted to
RoC within 30 days

AoA:
 Do not need sanction from Govt.
 Members can alter but should be consistent with MoA
 Special resolution must be forwarded within 30 days
 Resolution to alter the AoA has to be submitted to RoC.
Directors
Kinds of Directors: whole time directors, managing directors,
independent directors, nominee directors, alternate directors
and women directors

Number of Directors:
 Private Company: 2
 Public Company: 3
 OPC: 1
 Maximum: 15
 Among them atleast one woman director

Functions:
 Conduct board meetings
 Constitution of committees such as audit, finance and
personnel
 Conduct AGM
 Take decisions in matters of administration and
management of company
 Instances
(i) BMW Managing Director Mr. Stefan Schlipf was
arrested in July 2014 for cheating
 The case pertains to Delta Cars Private Limited, which was a
BMW dealer in Hyderabad from June 2007 to December 2009.
The dealership agreement expired on 31 December 2009, in the
absence of a further term renewal.

(ii) William C. Pinckney, CEO of Amway India was

arrested in connection with a criminal case registered
against the direct selling company.
 The CEO has been booked under the Prize Chits and Money
Circulation Schemes (Banning) Act besides charges of cheating
as well as extortion under relevant sections of the Indian Penal
Code (IPC)
Directors & their Liability
 “Officer who is in default” – Section 2 (60) of the
Companies Act, 2013

 In the aftermath of Harshad Mehta and Satyam fiasco,

Companies Act 2013 defined the term “Fraud” – to
incorporate corporate fraud (S.443 of the Act).
- any act or abuse of position committed with intent to
deceive, to gain undue advantage from, or to injure the
interests of a person, company, shareholders, or creditors,
whether or not there is wrongful gain or loss.

- Check Against Related-party Transaction

Director’s Liability
 is punishable with a fine which shall not be less than Rs 1 Lakh but which may
extend to Rs 5 lakhs.

 On an average, the minimum amount of fine that is imposed is Rs.25,000

 which in certain cases extends to Rs 25 crores or even more.

Where the penalties are Rs 1 crore or more:

 (a) Violation of provisions relating to not-for-profit companies (Section 8);
 (b) Violation of provisions relating to subscription of securities on private
placement (Section 42);
 (c) Issue of duplicate share certificates with an intent to defraud (Section 46
(5));
 (d) Failure to repay deposits within specified time (Section 74 (3));
 (e) Contravention of provisions relating to insider trading (Section 195 (2)).
Session – VII & VIII
EPGP
2022-23
Shareholder Theory
 Shareholder theory – Milton Friedman

 Sole responsibility of business is to increase profits.

 Management are hired as the agent of the shareholders to run the company for
their benefit, and therefore they are legally and morally obligated to serve their
interests.

 “conformity to the basic rules of the society, both those embodied in law and those
embodied in ethical custom.”

 This is the historic way of doing business with companies realising that there
are disadvantages to concentrating solely on the interests of shareholders.

 A focus on short term strategy and greater risk taking are just two of the
inherent dangers involved.

 Fall of Enron and Worldcom where continuous pressure on managers to

increase returns to shareholders led them to manipulate the company
accounts.
Stakeholder Theory
Stakeholders can be:
 owners and shareholders
 employees of the company
 Bondholders who own company-issued debt
 customers who may rely on the company to provide a
particular good or service
 suppliers and vendors who may rely on the company to
provide a consistent revenue stream
Contd..
 A company owes a responsibility to a wider group of
stakeholders, other than just shareholders.

 A stakeholder is defined as any person/group which can

affect/be affected by the actions of a business. It includes
employees, customers, suppliers, creditors and even the
wider community and competitors.
 Edward Freeman, the original proposer of the stakeholder
theory, recognised it as an important element of Corporate
Social Responsibility (CSR), a concept which recognises the
responsibilities of corporations in the world today, whether
they be economic, legal, ethical or even philanthropic.
CSR – Companies Act, 2013
Companies which have:
 Net worth of Rs. 500 crore or more; OR
 Turnover of Rs. 1000 crore or more; OR
 Net profit of Rs. 5 crore or more

Amount to be Spent on CSR Activities:-

 As per Section 135 of the Companies Act, 2013 -
company spends atleast 2% of average net
profits of the company made during the 3
immediately preceding Financial Years.
Companies (Amendment) Act,
2019
 Transfer of unspent funds – additional
requirement under the Amendment: If there are
any unspent CSR funds during a financial year -
transfer such unspent CSR funds into a special
account within a period of 30 (thirty) days from the
end of the financial year.
Contd..
 Penal liability for non-compliance: If a company
fails to comply with above mentioned obligations, the
Amendment provides for imposition of penalty of not
be less than INR 50,000 but which may extend to INR
2.5 million

 Additionally, the Amendment also provides for

imprisonment of every officer of the company who
is in default for up to 3 (three) years and a fine of not
be less than INR 50,000 but which may extend up to
INR 500,000 or with both
Contd..
 CSR in case new companies: It has now been
clarified in the Amendment that if the company has
not completed 3 (three) years from incorporation, the
amount to be spent on a CSR fund will be equivalent to
2 percent of the net profits made by the company in
the previous financial year (as against average net
profits made by the company in 3 (three) immediately
preceding financial years).
Meetings of the Company
 Annual General Meeting (AGM/GM) and Extraordinary General
Meeting (EGM)

 General Meeting: Meeting of members

 Every company other than OPC to hold GM annually

 Agenda for motion: ordinary and special business

 Ordinary Business: annual accounts, director’s reports, auditors’

reports, declaration of dividend, appointment of directors, and
appointment of statutory auditors.

 Procedure
 Minimum 21 days notice to members

 Notice must be accompanied by copy of director’s report,

audited accounts and auditor’s report

 It must contain the place, date and hour of meeting and must
also state the agenda of the meeting.

 Proxy could be appointed by members (corporate shareholders

too can appoint proxy)

 Chairman precedes the AGM

 Voting through postal means also possible provided not

involving decisions where hearing the other party is involved.
 Extraordinary General Meeting (EGM)
 For special or urgent business
 To be convened between two AGMs
 BoD or members can call the meeting
 1/10th voting power members must be called for meeting
when called by members other than BoD
 Quorum: no. of members present during the meeting for a
valid one

 Pvt. Co. - Minimum 2 members

 Public Co. – Depends upon total membership
- 5 members for 1000 members in total
- 30 members for 5000 members in total
Resolutions at the Meetings
 A motion means a proposal to be discussed at a meeting by
the members.

 A resolution may be passed accepting the motion, with or

without modifications, or a motion may be entirely
rejected.

 A motion, on being passed as a resolution becomes a

decision.

 Resolutions may be Ordinary (simple majority) or Special

(seventy five percent majority).
 Insolvency Law
 Applicable Law: The Insolvency and Bankruptcy Code, 2016

 Objectives of the Act:

(i) to consolidate and amend the laws relating to reorganisation
and insolvency resolution of corporate persons, partnership
firms and individuals in a time bound manner
(ii) for maximisation of value of assets of such persons,
(iii) to promote entrepreneurship, availability of credit and
balance the interests of all the stakeholders including alteration in
the order of priority of payment of Government dues and
(iv) to establish an Insolvency and Bankruptcy Board of India

Minimum threshold limit to initiate the process is Rs. 1 crore

credit
Processes for Insolvency
declaration
 Resolution Process and Liquidation Process

 Default – Appointment of Insolvency Professional (IP)

– Moratorium Period (180/270 days) – Credit
Committee Formation – 66% of the Creditors has to
approve
 If yes, implement the plan
 If no, then corporate person goes into liquidation
Resolution Process
Corporate insolvency resolution process
(i) Application on default – Any financial or operational
creditor(s) can apply for insolvency on default of debt or
interest payment

(ii) Appointment of IP – IP to be appointed by the regulator

and approved by the creditor committee. IP will take over the
running of the Company.
 From date of appointment of IP, power of Board of
directors to be suspended and vested in the IP.
Contd..
 (iii) Moratorium period – Adjudication authority will
declare moratorium period during which no action can be
taken against the company or the assets of the company.
Key focus will be on running the Company on going
concern basis. A Resolution plan would have to be
prepared and approved by the Committee of creditors

 (iv) Credit committee - A credit committee of creditors

will be constituted. Related party to be excluded from
committee. Each creditor shall vote in accordance to voting
share assigned if 75% of creditor approve the resolution
plan same needs to be implemented.
Liquidation process
(i) Initiation – Failure to approve resolution plan within specified days
will cause initiation of Liquidation. Debtor can also opt for voluntary
liquidation by a special resolution in a General Meeting.

(ii) Liquidator – The IP may act as the liquidator, and exercise all powers
of the BoD. The liquidator shall form an estate of the assets, and
consolidate, verify, admit and determine value of creditors’ claims.

Order of priority for distribution of assets

 Insolvency related costs
 Secured creditors and workmen dues upto 24 months
 Other employee’s salaries/dues up to 12 months
 Financial debts (unsecured creditors)
 Government dues (up to 2 years)
 Any remaining debts and due
 “Ease of doing biz: Enforcing contracts, IBC cases
remain hurdles for India”
– Business Standard, Nov. 4, 2018

 “Why India's product standards need an update and a

legal framework”
– Business Standard, Oct. 28, 2018

 “IL&FS crisis: Learnings in corporate governance”

– Business Standard, Oct. 8, 2018

P C Musthafa, iD story :
https://www.youtube.com/watch?v=01_eOCGNYN8