Syllabus for Legal & Taxation Aspects of Business

Indian Contract Act, 1872; Sale of Goods Act, 1930 Negotiable Instruments Act, 1881; Monopolies & Restrictive Trade Practices Act, 1969; Competition Act, 2002; Companies Act, 1956; Income Tax Act, 1961; Central Excise Act, 1944; Central Sales Tax Act, 1956; Maharashtra Value Adder Tax, 2002. Pollution Control Laws of India; Consumer Protection Act, 1986.

PRESENTATION ON : Indian Contract Act, 1872; Introduction to Companies Act,1956; Structural Break-up of C.A. 1956; MOA & AOA; Management of a Company Directors, Meeting Accounts & Audit;

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Definition Contract can be defined as An Agreement enforceable by law is a contract. A contract, therefore, is an agreement the object is to create a legal obligation , i.e. a duty enforceable by law. Essential elements of a valid contract 1. Offer and acceptance there must be a lawful offer and a lawful acceptance. 2. Intention to create legal relationship there must be an intention among the parties
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Essential elements of a Contract that the agreement should be attached by legal consequences and create legal obligations. 3. Lawful consideration consideration has been defined a the price paid by one party for the promise of the other. An agreement is legally enforceable only when each of the parties to it give something and get something. 4. Capacity of parties- the parties to an agreement must be competent to contract, otherwise it
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Essential elements of a Contract(contd..) cannot be enforced by court of law. 5. Free consent- consent means the parties have agreed upon the same thing in the same sense. Free consent is absent if there is coercion, undue influence, fraud, misrepresentation or mistake. 6. Lawful object- the parties to the agreement must agree for the valid lawful object. 7. Writing and Registration- all contracts to be legally valid, must be in writing and registered.
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Essential elements of a Contract(contd..) 8. Certainty- agreements, the meaning of which is not certain, or capable of made being certain, are void. 9. Possibility of performance- the contract must be capable of performance. An agreement which is impossible to perform, physically or legally is void.

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Kinds of Contracts 1. Valid contract- it is an agreement enforceable by law. Here, all the essential elements of a contract are existing. 2. Voidable contract- an agreement which is enforceable by law at the option of one or more of the parties there to, but not at the option of the other/s, is a voidable contract. 3. Void contract- this contract is not binding in law. The causes can be supervening
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Kinds of Contracts (contd..) impossibility or subsequent illegality. 4. Unenforceable contract- this is a contract which is valid in itself, but is not capable of being enforced in a court of law because of some technical defects such as absence of registration, adequate stamping, or if time barred. 5. Illegal or unlawful contract- this contract is contrary to the law and hence is void ab-initio.
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Kinds of Contracts (contd..) Contracts can also be expressed ,implied, constructive/quasi. Quantum Meruit means in proportion to the work done. For part performance of the contract, resulting in a breach, a suit of QM can be brought by the aggrieved party.

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Discussion on Companies Act, 1956 Most voluminous Legislation in the world; The Act has 658 Sections, XV Schedules; The entire Act is split into XIII Parts with each Part further being split into Chapters; The Rules and Forms are further stated in the Guidelines / Rules, 1957; There are many other Rules / Guidelines for supporting the provisions of the Sections
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Functional Division of the Act

Part I - Definitions, CLB, National Company Law Tribunal(NCLT); Part II Incorporation of a Co. & matters incidental thereto; Part III Prospectus & Allotment relating to issue of shares & Debentures; Part IV- Share Capital & Debentures; Part V Registration of Charges; Part VI Management & Administration; Part VII Winding Up; Part VIII Companies formed under Previous Co, Law;
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Functional Division of the Act (contd..) Part IX Cos. Authorised to Register under this Act; Part X Winding up of Unregistered Companies; Part XI- Cos. Incorporated outside India; Part XII- Registration Offices,& Officers & Fees; Part XIII- General- collection of Info. & statistics; The XV SCHEDULES follows thereafter.
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Some Basic facts of the Companies Act, 1956 For the interpretation of each Section, there are innumerable Case Laws from the various Courts that have pronounced judgment supporting or contradicting an earlier decision; Company Law is the source from which the subject of Auditing gets its identity, importance and procedures to initiate Corporate Audit; The Act is heavily based on interpretation and justification, which decides the case.
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Some Basic facts of the Companies Act, 1956 The Administrative Machinery to monitor the affairs is vested with the Ministry of Company Affairs(MCA), the Company Law Board(CLB); The routine functions are managed by the Registrar of Companies(ROC), having Regional Directors (RD), located in various states, where the companies are required to file documents and Returns, and the public is authorised to inspect the same according to the provisions of law.
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Some Basic facts of the Companies Act, 1956 The other Regulatory Authority is the Securities & Exchange Board of India (SEBI). Section 55A of CA, 1956, gives exclusive powers to SEBI to administer the issue and transfer of securities and the non-payment of dividends as is stated in various Sections of the Act. In the 2006 Amendment, MCA introduced eGovernance ( known as MCA-21), u/s 610 B,C,D for filing of Returns & payments.
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Some Basic facts of the Companies Act, 1956 ( contd..)

u/s 266A to G, Director Identification Number (DIN) was introduced in 2006, to ease in the correspondence with the ROCs and quick identification in e-Filing;

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A Company, its Nature and Kind Section 3(1)(i) defines a Company as A Company formed and registered under the Act or an existing Company. or A company is an incorporated Association, which is an artificial juridical person, having a separate legal entity, with a perpetual succession and a common seal, a common capital comprised of transferrable shares, and carrying limited liability. ( Saloman vs Saloman & Co. Ltd.) Jan, 11, 2011 PGDM -SEM I-2 LEG & TAX ASP 17
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A Company, its Nature and Kind( contd.) Section 11 defines an Illegal Association which states that No Company, Association or Partnership consisting of more than 20 persons ( 10 in the case of Banking Business) be formed to carry on any business for gain unless it is registered under the Companies Act or under any other law. Here the Liability is unlimited and personal.
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Types of Companies
PRIVATE COMPANY Sec 3(1)(iii):- A company with a minimum PUC of Rs one lac or more and which by its AOA 1) restricts the right of members to transfer shares, if any; 2) Limits the number of members to fifty , excluding members who were or are in the employment of the company; 3) Prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company, and 4) Prohibits any invitation or acceptance of deposits from persons other than members, directors or their relatives.
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Types of Companies (contd.)

PUBLIC COMPANY Sec 3(1)(iv):- It means a company which :Which is not a Private Co.; Has a min PUC of Rs. 5 lacs or such higher PUC, as may be prescribed; Can invite the public to subscribe to its shares & debs; Does not limit the max. number of members; Can invite or accept deposits from the public; and Is a Pvt. Co. but subsidiary of a Public Co.
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1) 2) 3) 4) 5) 6)

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Types of Companies (contd.) STATUTORY CO. :- It is incorporated by a special Act passed either by the Central or the State Legislature; GOVERNMENT CO. :- Section 617 defines a GC as any Company in which not less than 51% of the PUC is held by the Central / State Govt. FOREIGN CO. :- Section 591 to 596 discusses about such companies.
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Types of Companies (contd.) Section 25 Co. :- These are Companies having obtained the prior permission of the CG not to include the words Ltd or Pvt. Ltd. behind their names since they have been formed to promote commerce, art, science, religion or any other charitable purposes and not to distribute the profits as dividends but to plough them back for the aforesaid activities.

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Types of Companies (contd.)

Types of Companies based on Liability of Members: Companies limited by shares; Companies limited by Guarantee Sec 12(2)(b); and Unlimited Companies - Sec 12(2)(c). Holding and Subsidiary Company ( Sec 4);

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Exemptions & Privileges of Pvt. Co

a) Only 2 Members can start a Co. which is 7 for Pub. Ltd. Co. Sec 12; b) It can commence business immediately on incorporation as it need not wait to obtain the Certificate for commencement of business Sec 149(7); c) Can function with 2 Directors while three are required otherwise Sec 252(2); d) For General Meetings, the Quorum is 2 persons personally present which is five for pub Co Sec174(1);

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Formation of a Company It is a lengthy process involving:

Promotion Incorporation or Registration; Capital Subscription; and Commencement of Business.

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Memorandum Of Association (MOA) MOA can be defined as the Charter which defines the limitation of the powers of the company. The MOA contains the fundamental conditions upon which alone the company is allowed to be incorporated. The contents of the MOA NAME clause, REGISTERED OFFICE clause, OBJECTS clause, LIABILITY clause, CAPITAL clause &
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Memorandum Of Association (MOA) ASSOCIATION/SUBSCRIPTION clause. Under the Objects Clause, the MAIN and OTHER objects shall be separately stated. Alteration of the NAME Clause: A company may, by passing a Special Resolution, and with the approval of the C/G, in writing, change its name ( Sec 21). However, no such permission is required for dropping/addition of
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MOA ( contd..) the words Limited or Pvt. Ltd. to the Companys name. Spl Res requires 21 days notice and with 75% of the Members present ( or through Proxy ) and voting are in favour of the Resolution.

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MOA ( contd..) The Doctrine of Ultra Vires:According to this Doctrine, all such acts or transactions of a Company which are ultra vires ( beyond the powers of) the objects clause of its MOA, SHAL BE WHOLLY NULL & VOID, and can never be subsequently ratified and validated, even though all the shareholders consent or purport to ratify such transaction.
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Articles of Association (AOA) The AOA contains regulations for the internal administration of the Companys Affairs. It prescribes the Rules and Bye-Laws for the General Management of the Company and for the attainment of its objects as given in its MOA. Being subordinate to the MOA, the AOA cannot extend the objects as defined in the MOA.

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Contents of the AOA The extent to which TABLE A is applicable;

( Table A-Regulations for management of a company limited by shares)

Different classes of shares and their rights; Borrowing powers of Directors; Maintainance of Books of Accts and their Audit; Matters relating to Board Meetings; Winding Up; and many other Issues.

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ALTERATION OF AOA I. Sec 31- The alteration must not be inconsistent with the prov. of the C.A.,1956, MOA or alterations ordered by the CLB or any other statute; II. The alteration must not deprive any person of his rights under a contract; III. Approval of the C/G must be obtained in certain cases;
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ALTERATION OF AOA (contd..) IV. The alteration must not constitute a fraud on the minority; V. The alteration must be bonafide for the benefit of the company as a whole.

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Binding force of MOA & AOA U/s 36, subject to the provisions of the Act, the MOA and AOA shall, when registered, bind the company and the members. This includes: Company is bound to its Members; Each member is bound to the Company; Each member is bound to other members in exceptional cases only; and Neither the company nor the members are bound to outsiders.
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 The Doctrine of Constructive Notice states that after the MOA and AOA is registered, it becomes a Public Document, and a person dealing with the company in a manner which is inconsistent with the provisions contained therein, the person shall be deemed to have dealt with the company at his own risk and cost, and shall have to bear the consequences thereof.

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DOCTRINE OF INDOOR MANAGEMENT In contrast to the earlier Doctrine, this Doctrine implies that persons dealing with the company are not bound to enquire into the regularity of the internal proceedings. The exception to the Rule is that when the outsider had constructive notice of the irregularity, or where proper enquiry was not done which could have revealed the anomaly or the documents dealt with are forged.
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Distinction between MOA and AOA

MOA
States the broad framework within which the Co. functions; The MOA is subordinate to the Act; The MOA must be compulsorily filed with the ROC; Cannot be easily altered;

AOA
Mentions about the internal functioning which is subservient to the MOA; It is subordinate to the MOA; If Table A is adopted, then filing not required; Can be altered by special resolution only;

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Distinction between MOA and AOA

MOA AOA Acts done ultra vires the Acts done by the AOA, MOA are void and cannot ultra vires the AOA but be ratified; intra vires the MOA, are simply irregular and not void. Outsiders have no remedy Outsiders can enforce the contract if ultra vires the against the co. even it is AOA. ultra vires the MOA.

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COMPANY MEETINGS Statutory Meetings( Sec 165)- Applicable only for Public Ltd. Cos.- The issues discussed are:Total no. of shares allotted and its characteristics; Total cash received; Abstract of the Receipts & Payments Account; Names,addresses,& occupation of the Directors; Particulars of contracts entered into;
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1. 2. 3. 4. 5.

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Statutory Meeting ( contd..) 6. Extent of Underwriting contracts entered into and the reasons therefor; 7. Arrears of any dues on calls from the directors, managers and others; 8. Particulars of any commission / brokerage paid to the Directors. This Meeting is held once in the lifetime of a Public Ltd. Co.
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Annual General Meeting U/s 166, every company shall call an AGM every year and shall notify the members accordingly. Between two AGMs, there should not be a gap of more than 15 months. It should be held where the Registered Office is situated. The issues generally discussed are- To adopt the Accounts/ To declare a dividend/To appoint or reappoint Directors and To appoint the Auditors & fix his Remuneration.
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Convened General Meeting by C/G U/S 167, the C/Govt. can convene a General Meeting if default occurs in holding an AGM u/s 166. This generally happens when the Directors are not ready with the Accounts, or the Auditors are Qualifying the Statutory Audit Report which can doubt the integrity of the Directors.

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Extra-Ordinary General Meeting u/s 169, the Board can, on requisition of the Members, shall call this meeting to discuss specific issues. The Members so requesitioning, should hold at least 10% of the total voting power. Section 171 to 186 discusses on Meetings:Sec 171- Length of Notice 21 days notice in writing is required. Sec 173- Explanatory statement attached to the
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Meetings ( contd..) Notice explaining the facts and reasons for the item to be discussed. Sec 174- Quorum 5 members in the case of a Public Company and 2 members in the case of a Pvt. Co. Sec 175 Appointment of a Chairman. Sec 176- Proxies cannot speak at a meeting and can vote only if there is a poll. Sec 189- Ordinary & Special Resolution- It is 49:51
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Meetings (contd..) for passing an O/R and 75:25 for passing a S/R. Sec 190 Resolutions requiring Special Notice. Sec 192- Registration of certain resolutions and documents; Sec 205- Dividends to be paid only out of profits; Sec 205C- Unclaimed dividend to be transferred to Investor Education & Protection Fund

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Books of Accounts & Audit Sec 209 Books of Accounts to be maintained by the Company; Sec 210- At every AGM, the Balance Sheet and the P&L Account to be placed; Sec 212- Balance sheet of Holding Co. to include details of Subsidiaries; Sec 217- Board Report - the state of companys affairs, amounts to be transferred to Reserves, amount to be recommended as dividend, material
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Boards Report changes that have taken place between the B/S date and the date of the Report, activities of the Company and its Subsidiaries, remuneration received by executives exceeding Rs. 24 lacs per annum. Sec 217(2AA) discusses about Directors Responsibility Statement which states that the Accounting Standards have been followed, due prudence has been applied, proper care has been
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taken to safe guard the assets and to prevent frauds and irregularities, and lastly the Accounts have been prepared on a Going Concern basis.

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The Actual Reality

Facts, as such, never settled anything. They are working tools only. It is the implications that can be drawn from facts that count, and to evaluate these requires wisdom and judgment that are unrelated to the computer approach to life.
CLARENCE B. RANDALL
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