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Business Laws Part 1
Business Laws Part 1
Meaning When in a contract of sale, the When in a contract of sale the parties to
exchange of goods for money contract agree to exchange the goods for a
consideration takes place price at a future specified date is known as
immediately, it is known as Sale. an Agreement to Sell.
Title In sale, the title of goods transfers to In an agreement to sell, the title of goods
the buyer with the transfer of goods. remains with the seller as there is no
transfer of goods.
Suit for breach of The buyer can claim damages from Here the buyer has the right to claim
contract by the seller the seller and proprietary remedy damages only.
from the party to whom the goods
are sold.
Right of unpaid seller Right to sue for the price. Right to sue for damages.
2) Warranty vs condition
Condition-Conditions are certain obligations, terms, and provisions imposed by both parties.
Conditions are indispensable, and they need to be satisfied. Conditions are obligations that a party is
required to fulfill, such as completing a duty or task. Because it's required, it's an event that affects
the contract.
Warranty- A warranty is a written guarantee that a seller issues to a buyer regarding particular
claims. The claims are to be factual and valid. An example of a warranty is a seller committing to
replace or repair a product within a specified time if it doesn't meet the expected performance. This
guarantee concerns the fitness, quality, and the performance of the sold product.
3)Buyer be aware
Caveat emptor is a Latin phrase that is translated as “let the buyer beware.” The phrase describes the
concept in contract law that places the burden of due diligence on the buyer of a good or service.
Caveat emptor is a fundamental principle in commerce and contractual relationships between a
buyer and a seller. Although the caveat emptor principle can be applied to the purchase of any good
or service, nowadays, it is primarily applied to real estate transactions. Most consumer goods
transactions in different jurisdictions are regulated by specifically designed acts, while the caveat
emptor principle is losing its significance. In addition, the financial services industry is a major
exception from the caveat emptor principle. Regulators require sellers of financial products to
disclose as much information as possible to the buyers. Generally, the seller of a financial product is
required to provide relevant information about the product in a standardized form. John purchases a
house from Adam. Before the purchase, John asked the seller about the defects in the house. Adam
told him that there was a leak in the bathroom upstairs, but it was fixed already. However, Adam also
warned him that despite the repairs, a small leak could occur from time to time. John failed to
inspect the bathroom properly but still decided to buy the house. After three months, there was a
big leak that damaged the floor in the bathroom and the ceiling in the dining room downstairs. John
decided to go to court to recover damages from Adam. However, the judge stated that John is not
entitled to any remedy because the caveat emptor principle is applied. John did not perform
thorough due diligence to ensure that the defect in the bathroom could not cause any damage in the
future. The caveat emptor principle does not apply when the seller provides false information to the
buyer, or when there is a misrepresentation of the product.
Partnership Firm
Company
Definition
Partnership Firm is a mutual agreement between two or Company is an association of persons with a common
more persons to run the business and share profit and loss objective of providing goods and services to customers.
mutually.
Applicable Act
2 members for a partnership firm 7 for public limited, 2 for Private Limited,
Partnership Deed required for the creation of a partnership Memorandum of Association and article of association
firm is mandatory for incorporating a company
Capital Requirement
No such amount required 1 Lakh minimum for a Pvt Ltd and 5 lakh in case of
Public Company
Requirement of Audit
Transferability of Shares
All the partners of a partnership firm have the right to take part in the business conducted
by the firm as a partnership business is a business of the partners, and their management
powers are generally coextensive. If the management power of a particular partner is
interfered with and the individual has been wrongfully precluded from participating, the
Court of Law can intervene under such circumstances. The Court can, and will, restrain the
other partner from doing so by injunction. Other remedies are a suit for dissolution, a suit
for accounts without seeking dissolution and so on for a partner who has been wrongfully
deprived of the right to participate in the management.
When a difference of any sorts arises between the partners of a firm concerning the
business of the firm, it shall be decided by the views of the majority among the partners.
Every partner in the firm shall have the right to express his opinion before the decision is
made. However, there can be no changes like the business of the firm without the consent
of all the partners involved. As a routine matter, the opinion of the majority of the partners
will prevail. Although, the majority rule would not apply when there is a change like the firm
itself. In such situations, the unanimous consent of the partners is required.
Every partner of the firm, regardless of being an active or a sleeping partner, is entitled to
have access to any of the books of the partnership firm. The partner has the right to inspect
and take a copy of the same if required. However, this right must be exercised bonafide.
No partner of the firm is entitled to receive any remuneration along with his share in the
profits of the business by the firm as a result of taking part in the business of the firm.
Although, this rule may always vary by an express agreement, or by a course of dealings, in
which case the partner will be entitled to remuneration. Thus, a partner may claim
remuneration even in the absence of a contract, when such remuneration is payable under
the continued usage of the firm. It is common for partners to agree that a managing partner
will receive over and above his share, salary or commission for the trouble that he will take
while conducting the business of the firm.
Partners are entitled to share all the profits earned in the business equally. Similarly, the
losses sustained by the partnership firm is also equally contributed. The amount of a
partner’s share must be ascertained by inquiring whether there is an agreement in that
behalf among the partners. The is no relation between the proportion in which the partners
shall share the profits and the percentage in which they have contributed to the capital of
the partnership firm.
If a partner subscribes interest on capital is payable to the partner under the partnership
deed, then the interest will be payable out of the profits only in such a case. In a general
rule, the interest on a capital subscribes by partners is not permitted unless there is an
agreement or a usage to that effect. The underlying principle in this provision of law is that
with concern to the capital brought by a partner in the business, the partner is not a creditor
of the firm but an adventurer.
If a partner makes an advance to the partnership firm in addition to the amount of capital to
be contributed by him, the partner is entitled to claim interest thereon at 6 per cent per
annum. While the interest on capital account ceases to run on dissolution, the interest on
advances keeps running even after dissolution and up to the date of payment. It can be
noted that the Partnership Act makes a distinction between the capital contribution of a
partner and the advance made by him to the firm. The advance by the partner is regarded
as loans which should bear interest while the capital interest takes interest only when there
is an agreement to this effect.
All the partners of the firm have the right to be repaid by the firm in respect of the payments
made and the liabilities incurred by him in the ordinary and proper conduct of the business
of the firm. This also includes the performance of an act in an emergency for protecting the
firm from a loss, if the payments, liability and action are such as a prudent man would make,
incur or perform in his case, under similar circumstances.
All the partners of a partnership firm have the right to prevent the introduction of a new
partner in the firm without the consent of all the existing partners.
Every partner of a partnership firm has the right to withdraw from the business with the
consent of all the other partners. In the case of a partnership formed at will, this may be
done by giving a notice to that effect to all the other partners.
Every partner of a partnership firm has the right to continue in the business. A partner
cannot be dismissed from the firm by any majority of the partners unless conferred by a
partnership agreement and exercised in good faith and for the advantage of the partnership
firm.
If a partner has passed away or ceased to be a partner and the existing partners carry on
the business of the firm with the property of the firm without any final settlement of
accounts as between them and the outgoing partner or his estate, the outgoing partner or
his estate has, at his or his representative’s option, the right to such share of profit made
since he ceased to be a partner as may be attributable to the use of his share of the
property of the firm or interest at 6 per cent per annum on the amount of the partner’s
share in the property of the firm.
A partner of a partnership firm has the right to dissolve the partnership with the consent of
all the other partners. However, where the partnership is at will, the firm may be dissolved
by any partner by giving notice in writing to all the other partners of his intention to dissolve
the firm.
5)Duties of a Partner
The following are the duties of a partner in a partnership firm.
Partners are legally bound to carry on the business of the partnership firm. The general
responsibilities of a partner are listed below.
A partner has to render to any other partner or his legal representative about the true
account and all the information of all the things affecting the partnership firm.
According to Section 10, a partner of the partnership firm is liable to compensate the firm
for any damages caused to its business or the firm because of a partner’s fraud in the
conduct of the business of the firm.
According to the Section, a partner of a partnership firm must compensate the firm for any
damages or loss caused to it by willful neglect in the conduct of the business of the firm.
Section 12(b) & Section 13(a): To attend duties diligently without remuneration
According to Section 12(b) of the Indian Partnership Act, every partner is legally bound to
attend to his duties diligently to his duties relating to the conduct of the firm’s business.
Moreover, Section 13(a) enumerates that a partner is not, however, generally entitled to
remuneration for participating in the conduct of the business. A partner is also bound to let
his partners have the advantage of his knowledge and skill.
All the partners of a partnership firm are liable to contribute equally to the injury sustained
by the firm.
If a partner of a partnership firm derives any profit for himself for any transaction of the
firm or from the use of the property or business connection of the firm or firm’s name, then
the partner is bound to account for that profit and refund it to the firm.
Section 16(b): To account and pay for profits of competing for business
If a partner carries on a company of the same nature as the firm and competes with that of
the firm, the partner must be accountable for and pay to the firm all the profits made in the
business by the partner. The partnership firm will not be held liable for any losses caused in
the business.
6) Characteristics of a Partnership
A partnership is an unincorporated association of two or more individuals to carry on a business
for profit. Many small businesses, including retail, service, and professional practitioners, are
organized as partnerships.
Limited life
The life of a partnership may be established as a certain number of years by the agreement. If no
such agreement is made, the death, inability to carry out specific responsibilities, bankruptcy, or the
desire of a partner to withdraw automatically terminates the partnership. Every time a partner
withdraws or is added, a new partnership agreement is required if the business will continue to
operate as a partnership. With proper provisions, the partnership's business may continue and the
termination or withdrawal of the partnership will be a documentation issue that does not impact
ongoing operations of the partnership.
Mutual agency
In a partnership, the partners are agents for the partnership. As such, one partner may legally bind
the partnership to a contract or agreement that appears to be in line with the partnership's
operations. As most partnerships create unlimited liability for its partners, it is important to know
something about potential partners before beginning a partnership. Although partners may limit a
partner's ability to enter into contracts on the company's behalf, this limit only applies if the third
party entering into the contract is aware of the limitation. It is the partners' responsibility to notify
third parties that a particular partner is limited in his or her ability to enter into contracts.
Unlimited liability
Partners may be called on to use their personal assets to satisfy partnership debts when the
partnership cannot meet its obligations. If one partner does not have sufficient assets to meet
his/her share of the partnership's debt, the other partners can be held individually liable by the
creditor requiring payment. A partnership in which all partners are individually liable is called
a general partnership. A limited partnership has two classes of partners and is often used when
investors will not be actively involved in the business and do not want to risk their personal assets. A
limited partnership must include at least one general partner who maintains unlimited liability. The
liability of other partners is limited to the amount of their investments. Therefore, they are called
limited partners. A limited partnership usually has LLP in its name.
Ease of formation
Other than registration of the business, a partnership has few requirements to be formed.
Transfer of ownership
Although it is relatively easy to dissolve a partnership, the transfer of ownership, whether to a new
or existing partner, requires approval of the remaining partners.
In most partnerships, the partners are involved in operating the business. Their regular involvement
makes critical decisions easier as formal meetings are not required to get approval before action can
be taken. If the partners agree on a change in strategy or structure, or approve a purchase of needed
equipment, no additional approvals are needed.
Most governmental regulations and reporting requirements are written for corporations. Although
the number of sole proprietors and partnerships exceeds the number of corporations, the level of
sales and profits generated by corporations are much greater.
Number of partners
The informality of decision making in a partnership tends to work well with a small number of
partners. Having a large number of partners, particularly if all are involved in operating the business,
can make decisions much more difficult.
7) Companies Act
Formation of company
The formation of a company goes through a number of steps, starting from idea generation to
commencing of the business. This whole process can be broken down into 4 major phases or steps,
which we will be discussing in the lines below.
Promotion stage
Registration stage
Incorporation stage
Promotion Stage: Promotion is the first step in the formation of a company. In this phase, the idea of
starting a business is converted into reality with the help of promoters of the business idea.
In this stage the ideas are executed. The promotion stage consists of the following steps:
Identify the business opportunity and decide on the type of business that needs to be done.
Perform a feasibility study and determine the economic, technical and legal aspect of executing the
business.
Interest shown by promoters towards the business idea and supply of capital and other necessary
procedures to start the business.
Registration stage: Registration stage is the second part of the formation process. In this stage, the
company gets registered, which brings the company into existence.
A company is said to be in existence, if it is registered as per the Companies Act, 2013. In order to get
a company registered, some documents need to be provided to the Registrar of Companies.
There are several steps involved in the registration phase, and are as follows:
Article of Association: Article of Association (AoA) is also required to be signed and submitted. All
members who previously signed MoA, should also be signing the AoA.
The next step is preparing a list of directors which should be filed with the Registrar of Companies.
Directors of the company should provide a written consent agreeing to be directors, should be filed with
the Registrar of Companies (RoC).
A statutory declaration should be made by any advocate of either the High Court or Supreme Court, or a
person of the capacity of Director, Secretary or Managing Director. This declaration shall be filed with the
RoC.
Certificate of Incorporation: Certificate of incorporation is issued when the registrar is satisfied with
the documents provided. This certificate validates the establishment of the company in the records.
Public companies receiving the certificate of incorporation can issue prospectus in order to make the
public subscribe to the share for raising capital. Once all the minimum number of required shares
have been subscribed, a letter should be sent to the registrar along with a bank document stating the
receiving of the money.
The registrar will issue a certificate upon finding the provided documents satisfactory. This certificate
is known as certificate of commencement of business. The company can start business activities from
the date of issue of the certificate and the business shall be done as per rules laid down in the MoA
(Memorandum of Association).
8)Characteristics of company
1. Voluntary association.
A company is an artificial person created by law. It is regarded as a legal person capable of entering
into contracts, owning property in its name, suing, and being sued by others.
Case Law: Union Bank of India vs Khader International Constructions and others: The Supreme Court
held that the word ‘person’ mentioned in Order 33, Rule 1 of Civil Procedure Code, 1908, includes
any company. Thus a company may also file a suit as an indigent (poor) person.
Info: Order 33, Rule 1 of CPC permits a person to file suit under the code as an indigent person if they
cannot bear the cost of litigation.
In State Trading Corporation of India Ltd. vs CTO (Commercial Tax Officer), Supreme Court held that
the State Trade Corporation, although a legal person, is not a citizen and can act only through a
natural person.
Certain fundamental rights provided by the Indian Constitution to protect a person are also available
to a company. For example – The right to equality (Article 14).
A company incorporated under the Companies Act, 2013 is treated as a separate person distinct from
its members under the law. Therefore, the company will be liable for all the acts of the company
except any illegal act done by the directors of the company.
Case Law: Salomon vs Salomon: Salomon had a business in leather and shoe manufacturing. Due to
some circumstances, he created his own company and sold his previous business of shoe
manufacturing to this company. Salomon gave one share each to his wife, daughter, sons, and the
rest of the company’s shares were held by him. After a few years, the company was wound up and
had some existing liabilities but did not have enough assets to pay off the liabilities. Unsecured
creditors sued Salomon for repayment of their money, but the court held that the company was not
an agent or a trustee for Salomon. The company is entirely different from the individual, and hence
the contentions of the creditors could not be upheld.
Company limited by Shares: Liability of the members shall be limited to the extent of unpaid money
or shares held by them.
A company can come to an end only by the process of winding up. The death or retirement of a
person does not affect the life of a company.
7. Transferability of shares.
Public company.
Private company.
A public company is free to transfer its share from one person to another, whereas, in a private
company, the right to transfer shares is restricted. And in One Person Company (OPC), the
transferability of shares is not allowed.
8. Separate property.
As we have already studied, a company is a separate artificial person created by law, and a company
is different from its members. Therefore, a company has its separate property and can own, enjoy,
and dispose of properties in its name.
Case Law: In RF Perumal vs H. John Deavin, it was held that no member can claim themselves to be
the owner of the company’s property during its existence or its wind up. A company cannot even
have an insurable interest in the property of the company.
A company can sue and be sued in its name and may even sue its members. It also has a right to seek
damages where a defamatory matter is published about the company, which affects its business.
Case Law: Abdul Haq vs Das Mal: In this case, Das Mal was an employee in the company and was not
paid a salary for several months, and therefore he sued the directors. The court held that the remedy
lies against the company and not against the directors or members of the company.
As a company is not a trustee for its shareholders, a shareholder cannot enforce a contract
established by his company because he is neither a party to the contract nor entitled to any benefit
from it.
A company cannot go beyond the power stated in its Memorandum of Association. The
Memorandum of Association regulates the power and fixes the objects of the company. Acts done
beyond the powers given in the Memorandum of Association are ultra-vires and hence treated void.
Members may derive profits without being burdened with the management of the company.
A company is created by law; throughout its life, carries on its affairs according to the law; and
ultimately is wind up by law. A company can be terminated only by the procedure of winding up.