THE COMPANIES

ACT,2013
• Introduction
The Companies Act,2013 has been enacted to consolidate and
amendment the law relating to the companies. The changes in the
existing company law(the companies act 1956) where
indispensable due to change in the national and international
economic environment and for expansion and growth of economy
of our country, the central government decided to replace the
companies act 1956 with a new legislation to meet the changed
national and international economic environment and further
accelerate the expansion and growth of our country.
The word Company is derived from Latin word ’companies’ it
means a group of persons who took their need together.
• Definition
Section 2(20) of the Companies Act 2013 defines the term
company ‘company means a company incorporated under this act
or under any previous company law’. Company is also defined as ‘a
voluntary incorporated association which is an artificial person
created by law with limited liability having a common seal and
perpetual succession ’.
Lord Justice Lindley defines a company as ‘by a company is
meant an association of many persons who contribute money or
money’s worth to a common stock and employ it for a common
purpose. The common stock so contributed is denoted in money
and is the capital of the company. The persons who contribute to it
or to whom it belongs are members. The proportion of capital to
which each member is entitled is his share.’
• Characteristics of a Company
1. Voluntary association :- A company is a voluntary association of
persons who have come together for a common object with
generally is to earn profit.
2. Incorporated association :- A company comes into existence on
incorporation under the companies Act.
3. Independent legal Entity :- A company is an artificial person
created by law though it has no body nor a soul the law
recognizes it as a person and hence enjoys almost all the rights
of a person.
4. Separate property :- A Company is capable of owning, enjoying
and disposing of property in its own name.
5. Legal restrictions :- The formation, working and winding up of a
company are strictly governed by laws , rules and regulations.
6. Perpetual Succession :- A company has a perpetual succession
7. Common Seal :- The seal of a company is of great importance. It
acts as the official mark of the company. Anything done under an
agreement between the company and the third party requires
recognition of the company in the form of an official seal.
8. Share Capital :- A Company mobilises its capital by selling its
shares. Those persons who buy these shares becomes share
holders and becomes members in it.
9. Limited Liability :- In the case of a company limited by shares
the liability of the individual member is limited in the sense that is
confined to the amount of money which a member has contributed
or has agreed to contribute to the common capital fund.
10. Transferability of Shares :- Shares in a company are
transferable and can be sold or purchased in the share market. In
a public company shares are freely transferred.
11. Ownership and Management :- The owners of a company are
its shareholders. The affairs of the company are managed by their
 COMPANY DISTINGUISHED FROM
PARTNERSHIP
• A company is the creation of law. It is registered under
Companies Act, while partnership is created by an agreement
between competent parties.
• Registration of a company is compulsory while it is not
compulsory for a firm.
• Minimum two persons and maximum fifty constitute a Private
Limited Company while minimum seven and maximum unlimited
constitute a Public Limited Company. But minimum two persons
constitute a partnership.
• A company has a separate legal existence of its own and is
considered as a separate person from its members. A firm has no
individual legal status.
• Property of the company belongs to the company. But property of
• Management of a company vests in the Board of Directors
elected by the shareholders. In Partnership firm, partners
manage the affairs of the firm.
• The liability of shareholders is usually limited. Partners of the
firm are liable to unlimited extent.
• In the case of companies, creditors are only the creditors of the
company and not of individual shareholders. But creditors of the
firm are also the creditors of the partners individually.
• Death of the shareholder does not affect the existence of a
company but death of a partner may mean dissolution of
partnership.
• Accounts of a company must be audited by an Auditor. But it is
not necessary in the case of a firm.
• Shares are freely transferable in a company but a partner cannot
transfer his share without the consent of other partners.
 KINDS OF COMPANIES
• Companies can be classified on the basis of :-
(1)Incorporation
(2)Liability of members
(3)Number of members

On the basis of incorporation companies may be classified as (a)

Chartered Companies (b) Statutory Companies (c) Registered
Companies.
On the basis of liabilities, companies can be (a) Companies with
liability limited by shares (b) Companies with liability limited by
guarantee (c) Companies with unlimited liabilities
On the basis of number of members companies can be classified as
Private Companies and Public Companies.
 Private Company Public Company
• The minimum number of members • The minimum number of
should be two and maximum of members should be seven and no
50 members. limit for maximum number of
members.
• It must have a minimum paid up • Must have a minimum paid up
capital of Rs.One lakh. capital of Rs.5 lakhs.
• It cannot invite public to • It invites general public to
subscribe for shares or subscribe for its shares or
debentures. debentures.
• It can immediately proceed to • It shall have to wait for allotment
make allotment of shares after its of shares till the requiste
incorporation. minimum number of applications
are received and minimum
subscription is contributed.
• It can immediately commence its • It shall have to wait till certificate
business, after incorporation. for commencement of business is
• It is not necessary to hold received.
statutory meeting of the • It has to hold statutory meeting
members. and to file a statutory report.
• Quorum required for a meeting is • Five persons must personally be
two persons. present.
 Private Company
• Not required to issue prospectus
• Memorandum of Association need
be signed only by 2 members
• There is no need for more than
two directors
• Not necessary for the Directors
to retire by rotation
• Restriction about the age for
continuing in office for a Director
does not apply
• Previous approval of the Central
government not required for
grant of loan to directors
• ‘Interested’ Director can
participate or vote in the Board’s
Public Company
• Issuing of prospectus is a
necessary pre-condition
• Memorandum of Association
should be signed by at least 7
members
• There must be at least three
directors
• One-third of Directors have to
retire by rotation.
• A director cannot hold office after
he has attained the age of 65
years
• Previous approval is mandatory
before loans are granted to its
Directors
 Private Company
• It can be wound up only if its
members fall short of two
• The members have no right to
receive the balance sheet
• Its name should end with the
word ‘Private Limited’
• Free for further issue of capital
Public Company
• It can be wound up only if its
members fall short of seven
• The members have no right to
receive the duly audited balance
sheet of the company
• Its name should end with the
word ‘Limited’
• Further capital can be issued to
the existing members
 FORMATION OF A COMPANY

A company comes into existence when a number of persons come together with a
view to commence some business. They form an incorporated company after
complying with all requirements. An incorporated company may be (a) limited by
shares (b) limited by guarantee (c) unlimited company.
The formation of a company involves four distinct stages (a) Promotion (b)
Registration or incorporation (c) Raising of Capital (d) Commencement of
Business

PROMOTION
Promotion is the first stage in the formation of a company. In this stage, first, the
idea of carrying on a business is conceived by a person or by a group of persons
called promoters. They make detailed investigations about the workability of the
idea, the amount of capital required the operating expenses and probable
income.
• Promoter
The promoters of a company are those persons who set in motion the
machinery of law for setting up and starting company. They are the
persons who form or float of a company.
• Remuneration of Promoter
(a) A promoter is entitled to get the reimbursement of preliminary
expenses incurred by him in promoting the company.
(b) The promoter has no right to receive remuneration for high services
unless there is a contract to this effect but a promoter is entitled to be
remunerated by way of commission on the sale of his property to the
company.
(c) In some cases, the articles empower the directors to pay a specified
sum to the promoters, either as commission, profit or one time
payment.
(d) Promoters may be given fully or partly paid shares as consideration of
services
(e) Promoters may be given a commission on the shares sold.
• Liabilities of a promoter
(a) He is liable for mis-statements in the prospectus
(b) He is liable to make good the loss sustained by the company on sale
of its property
(c) He is liable to compensate any person who subscribes to the capital
of the company on account of irregular or misleading prospectus
(d) He is criminally liable under the Companies Act for breach of trust and
untrue statements made in the prospectus
(e) He may be sued for damages for breach of his fiduciary duty
(f) He is also criminally liable with imprisonment for any false statement
made in the prospectus
(g) He is liable for his auctions done with regard to the formation of the
company and to third parties for all contracts entered into on behalf
of the company prior to its incorporation.
• Functions and duties of a Promoter
(1) He settles the company’s name and ascertains that it will be accepted
by the Registrar of Companies. He also settles the details of the
company’s Memorandum and articles, nomination of directors
(2) He cannot make any profit unless the company consents. He may be
compelled to surrender the profit.
(3) He must faithfully disclose all facts relating to the property and
contracts, his interest and profit to the Board of directors or to the
share holders of the company
(4) He must see that the prospectus or statement in lieu of prospectus
does not contain any untrue or misleading statement.
• Legal position of Promoter
In the eye of law, a promoter is neither an agent nor a trustee of the
company. However for all practical purposes the promoter stands in a
fiduciary relation to the company since the company when comes into
existence usually ratifies the contracts made by the promoter with
different parties. But the promoter has to disclose fully the material facts
regarding the formation of the company.
 INCORPORATION(REGISTRATION)
• Procedure for registration
The promoters have to first of all decide upon the proposed form of company as
whether it is to be a Public Company or a Private company. In case of a Public
company any seven person and in case of a Private Company any two persons
may join to form an incorporated company. They may form the company with the
company with limited or unlimited liability, limited by shares or by guarantee.
The application shall be accompanied by the following documents
1. Memorandum and Articles of Association of the company with necessary
stamp duty and filing fees according to the authorized capital of the
company.
2. Agreement if any which the company proposes to enter into with any
individual for appointment as manager
3. A statement of the nominal capital
4. A notice of the address of the registered office of the company.
5. A declaration by an Advocate of the Supreme Court or of a High Court
or attorney or a chartered accountant who is engaged in the formation of
the company.
In the case of a public company, the following further requirements are
to be complied with
i. A list of persons who have consented to act as directors
ii. A written consent of the Directors to act in that capacity
iii. An undertaking by the Directors to take up and pay for their
qualification shares
 ADVANTAGES OF INCORPORATION

1. Limited liability – The liability of all the members of a limited company is

limited to the nominal amount of their shares there in
2. Transferability of shares – Shares in a company can be transferred to
another without the consent of the other members
3. Separate legal entity – A Company has separate legal entity from its
members and its existence is not affected by the death of insolvency of a
member
4. Control – The control of a company can be secured by the acquisition of
the majority of the shares which carry the voting power
5. Perpetual succession and common seal – Life of a company is not
measured by the life of any of its members. Company has an official seal.
It acts as the official mark of the company
6. Separate property – A company can own, enjoy and dispose of its
property and it does not belong to the share holders.
7. Management – The formation of a company permits the proprietors of
a business to realize his goodwill or to relieve himself of the actual
management if he so desires, while retaining the controlling interests in
the business.
8. Dealings between members and the company – In the case of a
company which is a legal person distinct from its members , dealings
between the members and between the company and its members
present no difficulty.
 DISADVANTAGES OF INCORPORATION

1. Incorporation requires expenses.

2. Incorporation gives enormous powers to the state and the law courts
to interfere in the affairs of the company
3. The management of the corporation is entrusted to a few selected
persons
4. When the number of members is reduced below the statutory
minimum the advantages of incorporation are withdrawn and the
members become severally liable for the whole debts of the company
under certain conditions
5. A company though a legal person is not a citizen.
6. The company has a separate legal entity. Therefore there is a veil
between the company and its members.
 RAISING OF CAPITAL
After the incorporation of a public company, a copy of the prospectus is
filed with Registrar of Companies and on the specific date it will be
issued to the public. Consequently applications are received from the
public for purchasing shares. If the company have received applications
for the amount more than or equal to the minimum subscription the
directors will proceed with the allotment work. Allotment letters are
issued to those whom shares are allotted.
 COMMENCEMENT OF BUSINESS
A private company can commence business and borrow money as soon as
it is incorporated. But a public company can commence business only
after undergoing certain further formalities and obtaining a certificate of
commencement of business from the Registrar.
1. A copy of the prospectus has been filed with the Registrar
2. The shares payable wholly in cash have been allotted at least to the
extent of the minimum subscription
3. Every director has paid the application and allotment money in the
same proportion as others, in respect of the shares held by him
4. A duly verified declaration by the secretary or one of the directors
that the above conditions have been complied with, is filed with the
registrar.
 MEMORANDUM OF ASSOCIATION
Memorandum of Association is the document which contains the rules regarding
constitution and activities or objects of the company. It is a fundamental charter of
the company. It is one of the documents which has to be filed with the registrar of
companies at the time of incorporation of company. Company is governed by the
Memorandum of Association. Memorandum of Association defines the extent of
powers of the company, and the company works within the framework of that.
Form of Memorandum of Association
Memorandum should be in one of the forms in table B,C,D and E in schedule I of the
companies Act.
Table B for memorandum of association of a company limited by shares, Table C for
memorandum of association of a company limited by guarantee and not having a
share capital, Table D for memorandum of association of a company limited by
guarantee and having a share capital and Table E for memorandum of association
of an unlimited company.
Purpose of Memorandum of Association
1. The intending shareholder can find out from the Memorandum the purpose for
which his money is going to be used by the company and what risk he is taking in
making the investment.
2. Memorandum enables all those who deal with the company to know what its powers
are and what the range of its activities are.
Clauses in the Memorandum of Association
The memorandum of association is a document of great importance in relation to the
proposed company and it should contain the following clauses
3. Name clause :- The first clause of the memorandum requires to state the name of
the proposed company. A company, being a legal person, must have a name to
establish its identity. The name of a corporation is the symbol of its personal
existence. The name should not resemble with a existing company which have
previously registered which may deceive or mislead.
4. Registered office clause(Domicile clause) :- The memorandum must specify the state
in which the registered office of the company is to be situated. Within 30 days of
commencement of business, the exact place where the registered office is to be
located must be decided and notice of the situation be given to the registrar. The
office can be shifted from one to another within the same city or village but from
state to another is complicated as whole memorandum has to be altered.
3.Object clause :- Most important clause of the Memorandum of
Association. It defines the object of the company and extent of its
powers and the sphere of its activities. The object of the company must
be stated clearly and they must not be illegal. They must not be against
the provisions of the Companies Act 2013 and must not be against public
policy also. A company cannot do anything beyond or outside the objects
clause , and any act beyond it will be ultra vires and void. The object
clause are divided into three sub clauses
• Main objects
• Other objects
• States to which objects extend
4.Liability clause :- This clause has to state the nature of liability that the
members incur. If the company is to be incorporated with limited liability,
the clause must state that the liability of the members shall be limited by
shares. No member can be called upon to pay any thing more than the
nominal value of the shares held by him or so much there of as remains
unpaid.
5.Capital clause :- This clause contains the amount of the capital with
which the company is registered and the number and value of the shares
into which it is divided. The capital is registered as ‘nominal’ ,
‘authorized’ or ‘registered’. An unlimited company having a share capital
is not required to include the capital clause in its memorandum
6.Association or subscription clause :- The memorandum concludes with
the subscription clause. The memorandum has to be subscribed by at
least seven persons in the case of a public company and by at least two
in the case of private company. Each subscriber must sign the document
and must write the number of shares taken by him.
Alteration of Memorandum of Association
The Memorandum of association is a principal document of a company. The
clauses of Memorandum of association cannot be easily changed. Procedures
are laid down for alteration of different clauses of the memorandum.
(a)Alteration of Name clause
1. According to Section 21 of the company may change its name by passing a
special resolution and with the permission of the Central Government.
2. A company which is registered with a name which in the opinion of the
Central Government is identical or resembles with the name of an existing
company, shall change its name with the previous permission of the
central government.
(b)Alteration of Domicile clause
The domicile of a company is the place of its registered office. A company may
change its domicile from one place to another within the state or from one
locality in the same city or from one state to another, on various grounds.
Change in the place of the registered office in any of the above manner will
require the change in the domicile clause of the memorandum of association.
(c)Alteration of Object Clause
The object clause of a company is an important clause, the change, in which
amounts to a change in the nature of a company as a whole. A company can alter
its object clause if such alteration enables to
1. Carry on its business more economically or more efficiently
2. To attain its main object or purpose by new or improved means
3. To enlarge the local area of its operation
4. To restrict or abandon any of the object specified in the memorandum
5. To sell or dispose off the whole or any part of the undertaking of the company
6. To amalgamate with any other company or body of persons
7. To carry on some business which under existing circumstances may be
conveniently combined with the business of the company
(d)Alteration of Capital Clause
A company limited with share capital, if permitted by its article of
association may alter its Capital Clause for the undermentioned purpose
1. To increase the share capital
2. To consolidate its share capital into shares of higher denominations
3. To subdivide its share capital into shares of lower denominations
4. To convert its share into stock
5. To cancel the unissued capital
6. To reduce its share capital
(e)Alteration of Liability clause
The liability of members of a limited company or a guarantee company
cannot be made unlimited without their consent in writing. However,
the liability of Directors, Managing Director or manager can be made
unlimited by passing a special resolution, if the articles so permit and
with the consent of the officer in writing.
 ARTICLES OF ASSOCIATION
‘Articles’ means the articles of association of a company as
originally framed or as altered from time to time in pursuance of
any previous companies law. The articles are the regulations or
bye-laws of a company for carrying into effect the objects of the
company as defined by the company in its Memorandum of
Association and for the management of its internal affairs. While
the Memorandum of Association is the foundation of Company, the
Articles of Association are the rules and regulations framed for the
purpose of managing its internal affairs and for the benefit of
shareholders.
Companies which must have their own articles
1. Private companies limited by shares
2. Companies limited by guarantee
Provisions regarding number of members, share capital etc in the
Articles of Association
1. In the case of unlimited company, the article shall state the
number of members, with which company is to be registered
and share capital.
2. In the case of company limited by guarantee, the article shall
state the number of members with which the company is to be
registered
3. In the case of a private company, the article shall contain
provisions which (a) restrict the right to transfer its shares (b)
limit the number of members to 50 (c) prohibit any invitation to
the public to subscribe for any share or debentures of the
company.
 DISTINCTION BETWEEN
MEMORANDUM AND ARTICLES
MEMORANDUM OF ASSOCIATION ARTICLES OF ASSOCIATION
• It being the charter of the • They are subordinate to the
company, is the supreme Memorandum. If there is a
document. conflict between the articles and
the Memorandum the latter
prevails.
• Every company must have its own
memorandum • A company limited by shares
need not have articles of its own

• It defines and formulates the
fundamental condition of the
company’s incorporations
including the objects for which
the company is formed.
• The articles merely lay down the
various means and methods by
which the company desires to
fulfil those conditions and for
achieving those objects.
 MEMORANDUM OF ASSOCIATION
• It defines the powers of the
company. It is a contract between
the company and outside person
dealing with it or the world at
large.
• Memorandum cannot give the
company power to do any thing
contrary to the provision of the
Act
• It cannot be altered easily
• The ‘Rule of Ratification’ does not
apply to Acts ultravires the
ARTICLES OF ASSOCIATION
• These create a relationship
between the company and its
members as well as members
interse
• Articles are not only limited by
the act but they are also
subsidiary to the Memorandum
and cannot exceed the power
contained in the memorandum
• They can be altered easily by
passing special resolution
• The ‘Rules of Ratification’ applies
to the act ultravires the articles
but intra-vires the Memorandum
 PROSPECTUS
“Prospectus” as any document described or issued as a prospectus and includes a red
herring prospectus (section 32), or any notice, circular, advertisement or other
document inviting offers from the public for the subscription, or purchase of any
securities of a body corporate. Prospectus is not an offer in itself but an invitation to
make an offer. The prospectus must be in writing. An oral invitation to subscribe for
shares will not be considered prospectus.
Issues of securities by the Company
1. Issue of securities by Public Company
(i) to public through prospectus
(ii) through private placement
(iii) through a rights issue or a bonus issue
(iv) in case of a listed company or a company which intends to get its securities
listed with the provisions of the Securities and Exchange Board of India Act, 1992
and the rules and regualtions made there under.
2. Issue of securities by private company
Whereas a private company may issue securities
(a) By way of rights issue or bonus issue or
(b) Through private placement

Matters to be stated in the prospectus

(1) Contents of the prospectus : Every prospectus issued by or on behalf of a
public company either with reference to its formation or subsequently, or by
or on behalf of any person who is or has been engaged or interested in the
formation of a public company, shall be dated and signed and shall
(a) State the following information, namely :-
(i) Names & addresses of registered office and the other persons (like company
secretary, chief financial officer, auditors, legal advisers, bankers, trustees)
(ii) Dates of the opening and closing of the issue, and declaration made by
board or the committee about the issue of allotment letters and refunds of
the application money within the 15 days
(iii) A statement by the board of directors about the separate bank
account where all monies received by out of the issue are to be
transferred and disclosure of details of all monies
(iv) Details of the underwriters and the amount underwritten by them
(v) Consent of directors, auditors, bankers to the issue, expert’s opinion
if any and such other persons as prescribed under the rules
(vi) Authority for the issue and details of the resolution passed therefor
(vii) Procedure and time schedule for allotment and issue of securities
(viii) Capital structure of the Company in the prescribed manner
(ix) Main objects of public offer, terms of the present issue and such
other particulars as may be prescribed
(x) Main objects and present business of the company and its location,
schedule of implementation of the project
(xi) Other particulars relating to management view of risk factors,
gestation period, extent of progress, deadlines for completion, any legal
action or legal action pending
(xii) Minimum subscription amount payable by way of premium, issue of shares
otherwise than on cash
(xiii) Details of directors including their appointments and remuneration, and such
particulars of the nature and extent of their interests in the company as may be
prescribed
(xiv) Disclosures of the sources of promoter’s contribution; in such manner as may
be prescribed

(b) Set out the following reports for the purposes of the financial information
(i) Reports by the auditors of the company with respect to its profits and losses and
assets and liabilities and such other matters as may be prescribed.
(ii) Reports relating to profits and losses for each of the five financial years
immediately preceding the financial year of the issue of prospectus
(iii) Reports made by the auditors upon the profits and losses of the business of the
company for each of the five financial years immediately preceding issue and assets
and liabilities of its business on the last date to which the accounts of the business
were made up.
(iv) Reports about the business or transaction to which the proceeds of the
securities are to be applied directly or indirectly.
(c)Make a declaration about the compliance of the provisions of this act and a
statement to the effect that nothing in the prospectus is contrary to the provisions
of this Act
(d) State such other matters and set out such other reports, as may be prescribed
(2) Exception :- The above stated section does not apply to
(a) To the issue to existing members or debenture-holders of a company, of a
prospectus or form of application relating to shares in or debentures of the
company
(b) To the issue of a prospectus or form of application, relating to shares or
debentures which are, or are to be in all respects uniform with shares or
debentures previously issued.
(3) Except the exceptions, the provisions of sub-section shall apply to a prospectus
or a form of application whether issued on or with reference to the formation of a
company.
(4) No requirement of issuing prospectus : No prospectus shall be issued by or on
behalf of a company or in relation to an intended company unless on or before the
date of its publication.
(5) Expert not liable for the statement under the prospectus : The prospectus
issued shall not include a statement purporting to be made by an expert
(6) Prospectus to state the delivery of copy and documents to the
registrar
(7) No registration of prospectus by the registrar
(8) Time period for the issue of prospectus
(9) In contravention of the provision
 Shares
The capital of the company is divided into different units of a fixed
amount which is known as share. A share is a right to a specified
amount of the share capital of a company, carrying with it certain
rights and liabilities. A share is not a sum of money ,but it is an
interest measured by a sum of money.
Different types of shares

(a)Preference shares
Preference shares are those which have a preferential right for the
payment of dividend during the lifetime of the company. They have
a preferential right for the return of capital when the company is
wound up.
A company may issue following types of preferences
1. Cumulative preference shares :- The dividend payable on these shares goes
on accumulating till it is fully paid. The holders of the cumulative preference
shares will have the right to get the predetermined rate of dividend each
year either from the profits of the year or from the following years.
2. Non-cumulative preference shares :- These are the shares on which the
dividend does not go on accumulating. If there are no profits or there are
inadequate profits in any year, these shares get no dividend or a partial
dividend.
3. Participating preference shares :- When preference shares are entitled to
participate with the equity shares in the balance of profits of a company in
addition to the stated profits they are known as Participating preference
shares.
4. Non-participating preference shares :- These shares are entitled to only a
fixed rate of dividend. They do not share in the surplus profits which go to
the equity shareholders.
5. Convertible preference shares :- The holders of these shares have a right to
convert them into equity shares within a certain period.
6. Non-convertible preference shares :- The preference shares without a right of
conversion into equity shares are called Non-Convertible preference shares.
7. Redeemable preference shares :- Ordinarily the capital that is raised
by the issue of shares can be returned by the company only on its
winding up. But a company limited by shares, if authorized by its
articles, issue preference shares are to be redeemed.
8.Irredeemable preference shares :- Irredeemable preference shares are
those which are repayable on the winding up of the company only.
(b) Equity shares
Equity shares, with reference to any company limited by shares are those
which are not preference shares. The holder of these shares are entitled
to dividend after the fixed dividend of preference share has been paid. If
no profit is left after paying dividends on preferences shares the equity
shares get no dividend.
 COMPANY MEETINGS
A company expresses its will or takes its decisions through resolutions passed
at regularly convened meetings of the share holders and their elected
representatives. Company meetings are meetings of directors or share holders
or the creditors or the debenture holders, who discuss matters relating to the
affairs of the company and take decisions affecting the company.
Different kinds of meetings of a company are:
(I) Meetings of directors
(a) MEETING OF BOARD OF DIRECTORS
Directors together form a body called Board of directors. The power of
management of a company is vested in this Board of directors. So the
Directors meet in order to exercise the powers vested in them. The powers of
the directors at meetings will be determined by the Articles and Companies
act.
(b) MEETINGS OF COMMITTEES OF THE BOARD
Sometimes the directors delegate some of their powers to committees
appointed by the board from time to time. The committees of directors also
hold meetings for formulating their recommendations to the board.
(II) Meetings of members
(a) STATUTORY MEETINGS
Statutory meeting is the first general meeting of the share holders of a public
company. Every public company limited by share and having a share capital,
shall within a period of not less than one month and not more six months
from the date at which the company is entitled to commence business, hold
General Meeting of members which is called statutory meetings.
(b) ANNUAL GENERAL MEETING
Every company shall in each year hold in addition to any other meeting a
General Meeting known as Annual General Meeting. It is one of the most
important general meetings of the share holders.
(c) EXTRA ORDINARY GENERAL MEETING
Any general meeting other than Statutory and Annual General Meeting is
called an Extra Ordinary General Meeting. It is convened to transact any
urgent or extra ordinary business. Extra ordinary general meetings are held
to transact business which fall outside the usual business of an Annual
General Meeting. Authorities that can convene the extra ordinary general
meeting
• The board of directors
• Directors on requisition
• Requisitionists
• Company law tribunal
(d) CLASS MEETING
Where the share capital of the company consists of different classes of
shares, meetings of different classes of share holders may have to be called
in order to discuss matters affecting them. The most frequent case in which
class meetings are required, arises when it is proposed to alter, vary or
affect the rights of a particular class of shares.
(III) Meetings of creditors and debenture holders
(a) MEETING OF DEBENTURE HOLDERS
A meeting of debenture holders may be held for any of the following
purposes (i) varying the security of debentures (ii) modifying the rights
attached to debenture (iii) altering the rates of interest (iv) altering any
provision in the trust deed.
(b) MEETING OF CREDITORS DURING THE LIFE TIME OF THE COMPANY
When a company proposes to make any compromise or arrangement with
its orders, a meeting of the creditors may be called the company law
tribunal may order such a meeting to be called if demanded by the
company or a creditor or a shareholder.
(c) MEETINGS OF CREDITORS IN WINDING UP
When the company is wound up, a meeting of creditors may be called at
the instance of the company or the liquidator to ascertain the total amount
due by the company to its creditors and also to appoint either liquidators
for winding up the affairs of the company or a committee for inspection.
 LAWS OF MEETINGS
Essential of a valid meeting are
(i) NOTICE OF MEETING
A meeting cannot be validly held unless all those who are entitled to attend it
have been communicated of the date, time, place and business of the meeting.
(ii) QUORUM
The quorum is the minimum number of members required to be present in
person before any business can be validly transacted. The quorum of a
meeting is generally fixed by the articles subject to provisions of act. If the
quorum is not present the proceedings of the meeting will not be valid.
(iii) CHAIRMAN
A chairman is the person who presides over and conducts the proceedings of a
meeting. He is the chief authority in the conduct and control of the meeting.
He should be fully conversant with the conduct of the proceedings of the
meeting.
(iv) AGENDA
Agenda means the list of business or ‘things to be done’ at the
meeting. It is prepared for all kinds of meetings in order that the
meeting may be conducted symmetrically. The agenda is generally
prepared by the secretary in consultation with the chairman of the
company.
(v) MINUTES
Minutes are the official records of the proceedings of the meetings
of a company. They contain description of the business transacted
and the decisions taken threat, in a correct and precise manner.
They represent a complete, true and correct record of the
proceedings of such meetings of the company.
(vi) MOTIONS
A motion is a proposition or a proposal put before a meeting for
discussion and decision. In other words, it is proposed resolution
or a question before the meeting. No decision on an important
(vii) INTERRUPTION OF DEBATE
When the chairman invites a debate on a motion, the debate on the original
motion is interrupted by a number of ways. Interruptions stopping the flow of
the discussion are formal or dilatory motions, amendments, points of order.
(viii) PROXY
Proxy is a personal representative of a shareholder appointed to act as his
agent in a meeting of the company. It also refers to the instrument by which a
person is appointed to act for another at a meeting of the company.
(ix) VOTING AND POLL
The object of holding meetings is to discuss some specific issues and take
decisions on them. Generally, after certain matters are discussed at large, the
decision in favor or against is taken by vote.
(x) RESOLUTIONS
Decisions of a company are made by resolutions of its members passed at
meetings of members. A resolution is the formal decision of a meeting on any
proposal before it. In the case of companies all important matters should be
decided by passing resolutions at duty convened and constituted meetings.
 Directors
The persons through whom a company acts and does its business, are termed
as directors. They occupy a pivotal position in the structure of joint companies.
They are collectively called as board of directors. Board of directors is the
supreme policy framing and decision making organ of a company.
Powers of Directors
(1) General powers: The directors derive their powers and authority from two
sources the articles of association and the companies act. The articles
contains a list of powers, which can be exercised by directors. The Act lays
down that the board shall be entitled to exercise all such powers and to do
all such acts and things as the company is authorized to do.
(2) Specific powers: Apart from the general powers of management and
control, specific powers have been conferred on the board of directors. The
act not only prescribes the nature and extent of powers but also specifies
the manner in which these powers may be exercised.
(3) Powers which can be exercised only at Board’s Meetings: The following
powers can be exercised by the board only by means of resolution passed
at Board Meeting and not by circulation of resolution.
• The power to make calls on share holders in respect of money unpaid on
their shares
• The power to issue debentures
• The power to borrow moneys otherwise than on debentures
• The power to invest the funds of the company
• The power to make loans
Restrictions on the board of directors
• Sell, give on lease or otherwise dispose of the whole or substantially the
whole of the company’s undertaking
• Remit or give time for repayment of a loan due from a director
• Invest compensation received by the company in respect of the
compulsory acquisition of any undertakings or properties used for such
undertakings, in securities, other than the trust securities
• Borrow money in excess of the paid-up capital and reserve fund of the
company
• Contribute to any char
 LIFTING OF CORPORATE VEIL
Once the company is incorporated it assumes a distinct existence apart from
its members. This is a protection given to the company and it is a veil to the
company. The simple meaning of this principle of lifting corporate veil is that
the appropriate court would not hesitate to lift the legal protection granted to
a company if that legal device is made to cover some illegitimate or
fraudulent activity on the part of the company. The various cases in which
corporate veil has been lifted for the purpose of investigating, are as follows
(1) For protection of revenue: The courts may ignore the corporate entity of a
company where it is used for tax evasion or to circumvent tax obligation.
(2) For prevention of fraud or improper conduct : The legal personality of a
company may also be disregarded in the interest of justice where the
formation of the company has been used for some fraudulent purpose like
defrauding creditors or defeating law.
(3) When the company is a sham : The courts also lift veil where the
company is mere cloak or sham ie, where the device of incorporation is
used for some illegal or improper purpose.
(4) For avoiding legal obligation : Where the use corporate veil is made to avoid
to legal obligation, the court may disregard the legal personality of the company
and proceed on assumption as if no company existed.
(5) For acting as agent or trustee of the share holders : Where a company is an
agent for its shareholders, share holders are liable for the acts of the company.
(6) For assuming the enemy character: A company assumes an enemy character
when it is trading with an alien enemy or when the persons managing the affairs
of the company are residents in the enemy country or under the control of
enemies. In such a case, court may disregard the corporate veil and declare the
company to be an enemy company.
(7) For avoidance of welfare legislation: It is the duty of the courts in every case
where there is avoidance of welfare legislation, to discover the true state of
affairs.
(8) For protecting public policy: The courts invariably lift the corporate veil to
protect public policy and prevent transactions contrary to public policy.
(9) For investigating into the affairs of the company: The corporate veil may also
be lifted (a) to investigate the lawful object of the company (b) to investigate
mismanagement and oppression by the majority (c) to investigate into the
affairs where there exists a tendency to create monopoly.
(10) When membership has been reduced: If at any time the number of
members of a company is reduced below 2 in the case of a private
company or below 7 in the case of a public company and it carries on
business for more than 6 months while the number is so reduced, every
member who knows of the fact, will become liable for all the debts of the
company contracted during that time.
 Doctrine of ‘ultravires’
The term ultra means beyond and vires means powers. Therefore
ultravires the company means beyond the power of a company. The
expression ultravires i.e. beyond powers denotes a very important legal
principle applicable to companies. If any act is done which is not
authorized by the objects clause in the Memorandum of Association such
act shall not be valid and is said to be ultra-vires of the company. Such
acts are void and cannot be validated even by the common consent of
the members in the general meeting. It has been held in a number of
decisions that, “where a company does an act which is ultra-vires no
legal relationship or effect ensues therefrom. Such an act is absolutely
void and cannot be ratified even if all the shareholders agree.” This rule
is obviously made applicable in company matters in order to protect
share holders and the public at large who deal with the company.
 WINDING UP OF COMPANIES
Winding up of a company is the process of putting an end to its life. The assets are
distributed among the creditors and shareholders in the manner laid down in the act.
The process of winding up involves the realization of the assets, payment of the liability
to creditors and distribution of surplus.
Modes of winding up of a company
1.Winding up by the tribunal
Winding up of a company by an order of the tribunal is also known as Compulsory
Winding
• Special resolution
It is the share holders who had formed themselves into the company and therefore it is
for them to dissolve the company. So if the company by a special resolution resolved
that it may be wound up by the tribunal, the tribunal may pass a winding up order.
• Failure in holding statutory meeting
The company must hold statutory meeting within 6 months from the date on which the
company is entitled to commence its business. Before holding this meeting, the
statutory report by the directors must also be delivered to the registrar for registration.
• Failure to commence business or suspends its business
If a company does not commence its business within a year from its
incorporation or suspends its business for a whole year, the tribunal may
order for its winding up.
• Reduction of membership below minimum
When the number of members is reduced below 7 in the case of a public
company, and below 2 in the case of a private company the tribunal may
order winding up of the company. An order for winding up under this clause
is rare.
• Inability to pay debts
Tribunal may order for winding up of a company if it is unable to pay its
debts.
• Just and equitable
The tribunal may consider it just and equitable that the company should be
wound if it is of that opinion. The tribunal will consider such grounds to
wind up a company for just and equitable reasons, as are not covered by
the previous clauses.
• Default in filling Balance sheet, profit and loss account or annual return
The tribunal may order for winding up, if the company has made a
default in filling with the Registrar its Balance sheet, profit and loss
account or Annual returns for any five consecutive years.
• Acted against sovereignty and integrity of India
If the company has acted against the sovereignty and integrity of India,
the security of the State, public order, decency or morality , the Tribunal
may order for its winding up.
• Sick industrial company
If the tribunal is of opinion that the company should be wound up under
the circumstances specified, the tribunal may order for its winding up.

Liquidator : The liquidator is a person who helps the Tribunal to complete

the liquidation proceedings ,ie, in realizing the assets of the company
and distributing them among the creditors and contributories.
2.Voluntary winding up
Voluntary winding up means winding up by the members or creditors of
the company without the interference of the tribunal. The object of a
voluntary winding up is that the company as well as the creditors are left
free to settle their affairs without going to the tribunal.
Circumstances in which company can be wound up voluntarily
(a) By passing an ordinary resolution: When the period for the duration
of a company by the article has expired, the company in general
meeting may pass an ordinary resolution for its voluntary winding up.
(b) By passing an special resolution: A company may at any time pass a
resolution that it be wound up voluntarily. No reason need be given
where the members pass a special resolution for the voluntary
winding up of the company.
There types of voluntary winding up.
(a) MEMBER’S VOLUNTARY WINDING UP
If the company at the time of winding up is a solvent company and is
able to pay its liabilities in full, the winding up is called members
voluntary winding up.
(1)Declaration of Solvency
The directors or a majority of them have to make a declaration to the
effect that they have made full inquiry into the affairs of the company
and that having done so, they have formed the opinion that the company
has no debts or that will be able to pay its debts in full within a specified
period not exceeding three years from the commencement of winding up.
(2)Shareholder’s resolution
After the above statutory declaration, the shareholders must meet and
pass an ordinary resolution or a special resolution, as the case may be,
for the winding up of the company.
(b) CREDITOR’S VOLUNTARY WINDING UP
If the company proposes to wind up voluntarily and the directors are not in a
position to make statutory declaration of solvency, the winding up is called
creditor’s voluntary winding up. In a creditors voluntary winding up, it is the
creditors who appoint liquidator and generally conduct the winding up.
Winding up of insolvent Companies
In the winding up of an insolvent company the same rules shall prevail and
be observed as are in force under law of insolvency, with regard to (a) debts
provable (b) valuation of future and contingent liabilities (c) rights of
sourced and unsecured creditors.
Winding up of unregistered Companies
An unregistered company may be wound up under this act and all the
provisions of this Act with respect to winding up shall apply to an
unregistered company with the exception that the principal place of
business of the unregistered company will be treated as registered office
and the appropriate tribunal of that place will have jurisdiction to wind up
the company.
Dissolution of a Company:- A company is said to be dissolved when
it ceases to exist as a corporate body capable body capable of
holding property or of being sued in any Tribunal. A company is
not dissolved immediately on the commencement of the winding
up proceedings. Winding up precedes the dissolution. On
dissolution, the company is no more in existence and its name is
struck off from the Register of companies. But on the winding up,
company’s name is not struck off from the register.
 PARTNERSHIP
Partnership is the relation between persons who have agreed to share
the profits of a business carried on by all or any one of them acting for
all. It therefore, follows that a partnership consists of three essential
elements
(i) It must be a result of an agreement between two or more persons
(ii) The agreement must be to share the profits of the business
(iii)The business must be carried on by all or any of them acting for all.
Essential elements of Partnership
(i) Agreement : An agreement from which relationship of Partnership
arises may be express. It may also be implied from the act done by
partners and from a consistent course of conduct being followed,
showing mutual understanding between them. It may be oral or writing.
(ii) Sharing profit of business : The term business includes every trade,
occupation and profession. The existence of business is essential. The
motive of the business is the acquisition of gains which leads to the
formation of partnership. Therefore there can be no partnership where
there is no intention to carry on the business and to share the profit
thereof. No charitable institution or club may be floated in partnership.
There must be an agreement to share profits but an agreement to share
losses is not an essential element.
(iii) Business carried on by all or any of them acting for all : The
requirement is that the business must be carried on by all the partners or
by anyone or more of the partners acting for all. This is the cardinal
principle of the partnership law. An act of one partner in the course of the
business of the firm is in fact an act of all partners.
 Test of Partnership
Sharing of profits is an essential element to constitute a partnership. But sharing
of profits or of gross returns accruing from property by persons holding joint or
common interest in the property would not by itself make such persons partners.
Where there is an express agreement between partners to share the profit of a
business and the business is being carried on by all or any of them acting for all,
there will be no difficulty in the light of provisions of section4, in determining the
existence or otherwise of partnership. But the task becomes difficult when either
there is no specific agreement or the agreement is such as does not specifically
speak of partnership. Cumulative effect of all relevant facts such as written or
verbal agreement, real intention and conduct of the parties, other surrounding
circumstances etc. are to be considered while deciding the relationship between
the parties and ascertaining the existence of partnership. Existence of Mutual
Agency which is the cardinal principle of partnership law, is very much helpful in
reaching a conclusion in this regard. Each partner carrying on the business is the
principal as well as an agent of other partners. So, the act of one partner done on
behalf of firm, binds all the partners. If the elements of mutual agency relationship
exist between the parties constituting a group formed with a view to earn profits
by running a business, a partnership may be deemed to exist.
Thus as laid down in Cox v. Hickman that the true test of partnership is agency, and
do not the sharing of profits.
 Partnership Deed
A partnership deed is a written legal document to avoid unnecessary
misunderstanding, harassment and unpleasantness among the partners in
the event of any dispute. For mutual benefit, the registration of Deed of
Partnership is made under the Indian Registration Act, 1908 so as to avoid
apprehension of the Deed of partnership being destroyed or mutilated in
the possession of the partners. A deed of partnership is required to be
made out and registered under the Indian movable property Act together
with other movable properties involved. An instrument of partnership may
be constituted by more than one document.
How do you form a business partnership?
1. Choose a business name
2. File a trade name
3. Draft and Sign a partnership agreement
4. Obtain licenses, permits and zoning clearance
5. Obtain an employer identification number
PROPERTY OF THE FIRM
The expression property firm also referred to as partnership property
denotes all property, rights and interest to which the firm, that is, all
partners collectively, may be entitled. The property which is deemed as
belonging to the firm, in the absence of any agreement between the
partners showing contrary intention, is comprised of
1. All property, rights and interests which partners may have brought into
the common stock as their contribution to the common business.
2. All the property, rights and interests acquired or purchased by or for the
firm, or for the purposes and in the course of the business of the firm and
3. Goodwill of the business
Goodwill may be defined as the value of the reputation of a business house
in respect of profits expected in future over and above the normal level of
profits earned by undertaking belonging to the same class of business.
Goodwill is a part of the property firm. It can be sold separately or along
with other properties of the firm. Any partner may upon the sale of the
goodwill of a firm, make an agreement with the buyer that such partner will
not carry on any business similar to that firm within a specified period.
NEGOTIABLE INSTRUMENTS ACT
A Negotiable instrument means a promissory note bill of exchange or
cheque payable either to order or to bearer. Any instrument which satisfies
the conditions of negotiability can be added to the list of negotiable
instruments.
Characteristics of a negotiable instrument
• Property : The possessor of the negotiable instrument is presumed to be
the owner of the property contained there in
• Freely transferable (negotiability) : The property in a negotiable
instrument can be transferred without any formality. It passes from one
person to another (a) by delivery, if the instrument is payable to bearer
(b) by the presentment and delivery if it is payable to order.
• Title of holder free from all defects : A bonafide transferee for value is
not affected by any defect of title on the part of the transferor or any of
the previous holders of the instrument.
• Recovery : The transferee of the Negotiable instrument can sue in his
own name, in case of dishonor for the recovery of the amount.
• Presumption : Certain presumptions apply to all negotiable
instruments, for example a presumption is that consideration has been
paid.
• Prompt payment : A negotiable instrument enables the holder of the
instrument to expect prompt payment.
• As good as cash : A negotiable instrument is a document but it is as
cash since cash can be obtained. It is a contract to pay money.
• Transferability : A negotiable instrument can be transferred any
number of times till it is at maturity and holder of the instrument need
not give any notice of transfer to the debtor.
Presumptions as to Negotiate Instrument
1. It is presumed that every negotiable instrument was made, drawn
accepted or endorsed for consideration
2. If the negotiable instrument is dated, then it is presumed that the
negotiable instrument is made or drawn on the date
3. Every accepted bill of exchange, if the time of acceptance is not noted
is presumed to have been accepted within a reasonable time after its
issue and before its maturity. If the acceptance is dated, that date is
taken as date of acceptance.
4. Transfer of a negotiable instrument is presumed to have been made
before its maturity, unless the time of transfer is noted.
5. It is assumed that the endorsement appearing in the negotiable
instruments were made in the order in which they appear.
6. It shall be presumed that the holder of a negotiable instrument is the
holder in due course.
 Promissory Note
A promissory note is an instrument in writing containing an unconditional
undertaking signed by the maker, to pay a certain sum of money only to or
to the order of a certain person or to the bearer of the instrument. The
person who makes promisor note and promises to pay is called the maker
and the person to whom the payment is to be made is called payee.
Essentials of promissory Note :-
• In writing : Mere words spoken is not enough. Promissory note must be in
writing. Writing may include print, type writing.
• Promise to pay must be express : It must contain an express undertaking
or promise to pay. A mere acknowledgement is not enough.
• Definite and unconditional : The promise to pay must be definite and
unconditional. If the promise to pay is uncertain or conditional, the
instrument becomes not negotiable.
• To be signed by the maker : The promissory note must be signed by the
promisor otherwise it is incomplete. Signature is to authenticate and give
effect to the contract contained in the instrument.
• Certainty in the case of sum of money : The sum payable must be
certain. The sum expressed to be payable by the promissory note must
be certain and must be capable of contingent additions or subtractions.
• Certainty in the case of parties : The instrument must point out with
certainty as to who is the maker and who is the payer. If the maker and
payee cannot be identified with certainty from the instrument which is
not a promissory note.
• Promise to pay money only : The payment must be in the legal tender
money of India. It must not be in bonds or bills or any other article.
• Formalities are not essential : Formalities like number, date, place,
consideration etc are usually found in an instrument even though they
are not essential in law. The date of promissory note is also not
necessary if the amount is not payable at a certain date.
• It may be payable on demand or after a definite period of time. Where
no time is mentioned, the note is payable on demand.
Bills of Exchange
A bill of exchange is an instrument in writing containing the unconditional
order, signed by the maker, directing a certain person to pay a certain sum of
money only to or to the order of a certain person or to the bearer of the
instrument. Bill of exchange is an order from the creditor to the debtor to pay a
specified amount to a person mentioned therein.
Essential elements of a Bill of exchange
• The instrument must be in writing
• The instrument must contain an order to pay, which is express and
unconditional
• There must be parties, drawer and drawee
• The instrument must be signed by the drawer
• The amount of money to be paid must be certain
• The payment must be in the legal tender moneys of India
• The money must be payable to a definite person or according to the order
• It must comply with the formalities as regards date, consideration, stamp etc.
Cheque
A cheque is a bill of exchange drawn upon a specified banker and not
expressed to be payable otherwise than on demand an it includes the
electronic image of a truncated cheque and a cheque in the
electronic. A cheque may be payable to bearer or to order but in
either case it must be payable on demand. All cheques are bills of
exchange but all his bills of exchange are not cheques. A cheque
must fulfill all the essential requirements of a bill of exchange.
Usually banks provide their customers with printed cheque forms
which are filled up and signed by the drawer. A cheque must be
dated. A cheque becomes due for payment on the date specified on it.
A cheque drawn on a future date is valid but it is payable on and after
the date specified. Such cheques are called post dated cheques.
 Types of Cheque
• Open cheque : A cheque which can be presented by the payee
for payment at the counter of the bank of which they are
drawn, are called open cheques. These cheques may be made
payable to the bearer or the payee. When such a cheque is in
circulation, a great risk attends it.
• Crossed cheque : Crossing of a cheque means putting two
parallel lines across the face of the cheque with or without
the use of words like ‘& Co’ , ‘Not Negotiable’ etc. Such
cheques are called crossed cheques. The payment of such a
cheque can not be obtained at the counter of the bank. Such
Cheques must be collected through a banker.
 MODES OF CROSSING A CHEQUE
• General Crossing
General crossings are defined as “When a cheque bears across its
race an addition of (i) the words ‘And Company ’ or any
abbreviation thereof, between two parallel transverse lines
simply, either with or without the word ‘not negotiable’, or (ii)
two parallel transverse lines simply either with or without the
words ‘not negotiable’ that addition shall be deemed a crossing,
and the cheque shall be deemed to be crossed generally.”
• Special Crossing
Special crossings are defined as “Where a cheque bears across
its face an addition of the name of a banker either with or
without the words “not negotiable” the cheque is deemed to be
crossed specially.” A cheque cannot be crossed specially more
than once specially. If a cheque is crossed specially more than
once, the banker can refuse payment.
Negotiation
When a promissory note, bill of exchange or cheque is transferred to
any person so as to constitute that person of the holder thereof, the
instrument is said to be negotiated. Negotiation thus requires two
conditions to be fulfilled namely (1) there must be a transfer of the
instrument to another person (2) the transfer must be made in such a
manner as to constitute the transferee the holder of the instrument.
Assignment
Bills, notes and cheques represent debts and as such have been held
to be assignable without endorsement. Transfer by assignment takes
place when the holder of a negotiable instrument sells his right to
another person without endorsing it.
Dishonor of a Negotiable Instrument
A bill may be dishonored by non acceptance or non-payment. A promissory note
and a cheque are dishonored by non-payment only. When a negotiable instrument
is dishonored, the holder must give a notice of dishonor to all the previous
parties in order to make them liable on the instrument.
• Dishonor by non-acceptance
If the drawee does not accept within 48 hours from the time of presentment
though the bill is duly presented for acceptance
If there are several drawees and if all of them do not accept
When presentment for acceptance is excused, and the bill is not accepted
When the drawee is incompetent to contract
When the drawee gives a qualified acceptance
When the drawee is a fictitious person
• Dishonor by non-payment
If the acceptor fails to make payment when it is due, the bill is dishonored by
non-payment. If the maker fails to make payment on the due date, the promissory
note is dishonored by non-payment. If the banker refuses to pay when a cheque
 Overview of Cyber law
Digital technology and new communication system have made dramatic
changes in our life style. Though people were aware of the advantages of
electronic medium, they were unwilling to conduct business or conclude any
transaction in the electronic form due to lack of appropriate legal frame work.
Therefore the laws and rules became necessary to facilitate electronic medium.
Objects of the Act
• To grant legal recognition to electronic records
• To grant legal recognition to digital signature for authentication of the
information
• To permit retention of information, documents and records in electronic form
where any law requires such retention for a specific period
• To foster use and acceptance of electronic records and digital signatures in
the government offices and its agencies
• To prevent possible misuse arising out of transactions and other dealings
concluded over the electronic medium
• To prevent and arrest offences as well as deter abuse of information
technology
• To deal with civil and criminal liabilities arising out of
contravention of the provisions of the law
• To provide necessary changes in the various provisions,
which deal with offences relating to documents and
paper-based transactions
• To facilitate electronic fund transfers between the
financial institutions and banks
• To give legal sanctity for books of account maintained in
the electronic form by banks.
 E-Contract
An E-contract is a contract modelled, executed and
enacted by a software system. Computer programs are
used to automate business processes that govern e-
contracts. E-contracts can be mapped to interrelated
programs which have to be specified carefully to satisfy the
contractual requirements. E-contract simply means a
contract formed electronically. A contract is a statement of
internet that regulates behavior among organizations and
individuals. E-contracts have been defined as “legally
enforceable promises or set of promises that are concluded
using electronic medium”
Electronic contracting is the “automated process of
 Salient features of E-contract
1. Offer
2. Acceptance
3. Intention to create legal relationship
4. Lawful consideration
5. Competency of the parties
6. Free consent
7. Lawful object
8. Not expressly declared to be void
9. Legal formalities
 Formation of E-contract
A contract is a legally enforceable agreement between two or more
parties with mutual obligations. The parties are said to be at consensus
when they have agreed about the subject matter of the agreement in the
same sense and at the same time. A contract is formed when one party
accepts the offer of another party. The Indian Contract Act 1872 governs
the manner in which contracts are made and executed but it is not
exhaustive in itself. It provides a framework of rules and regulations
which govern formation and performance of contract. Under the Indian
contract act 1872, the formation of a contract involves the following
three stages
1. The making of a proposal or offer by one person to another
2. The acceptance by the person to whom it is made of such proposals or
offer
3. The expression and communication of such acceptance
A contract may be formed orally or in writing and can even be conferred
from the conduct of the parties. Today with the emergence of online
An electronic contract may be formed either through an exchange of e-
mail or by completion of a document on an internet website which is
submitted to another party, electronically. There are three broad
categories of subject matter for e-contracts
1. Physical sale of goods:- Goods are ordered over the internet, payment
is also made over the internet through payment gateways, but
delivery occurs in the usual way physically.
2. Sale of digital products:- Goods such as software can be ordered, paid
for and delivered online
3. Supply for services:- examples includes electronic banking, sale of
shares, financial advice, or consumer advice.
 TYPES OF E-CONTRACT
E-contracts are classified into electronic data interchange and Cyber contracts
Electronic Data Interchange(EDI)
Electronic data interchange also known as EDI is the computer to computer
exchange of structured business information in standard electronic format. These
contracts provide direct exchange of business information among the parties
through computers. EDI is defined as a set of standards used to exchange business
information between computers and carry out business transactions electronically.
Electronic data interchange is the electronic exchange of structured business data
in standardized formats which involves data exchange among parties knowing each
other. Businesses that engage in EDI with each other are called trading partners.
EDI eliminates human involvement and enables the exchange of information
directly between computers. A Value Added Network (VAN) is an independent firm
that offers connection and transaction-forwarding services to buyers and sellers
engaged in EDI and were responsible for the security of the data transmission,
translation between standards, reformatting and conversion services.
 Cyber Contracts
A cyber contract is a contract created wholly or in part through communications
over computer networks. It can be created entirely by the exchange of e-mails
where an offer and an acceptance are evident or they can be made by a
combination of electronic communications, paper documents, faxes and oral
discussions.
Cyber contracts include the following
• Electronic mail or E-mail
E-mail is a method of exchanging digital messages across the internet or other
computer networks all over the world. The messages can be notes entered from
the electronic files stored on disk. It can be defined as the exchange of computer
stored messages by telecommunication.
• Shrink wrap contracts
Shrink wrap contracts refers to license agreements or other terms and conditions
of a contractual nature. Such terms or license agreements can only be read and
accepted by the customer after opening the product. The term shrink wrap
describes the plastic wrapping which is used to cover software boxes but that does
not mean that such contracts are limited to software industry only. The license is
contained inside a plastic shrink wrapped box containing the software.
• Click wrap agreements
Click wrap is the electronic equivalent to the shrink wrap method and
allow users to read the terms of the agreement before accepting them.
Instead of tearing the shrink-wrap, the enforceability of click-wrap is
through the simple act of clicking the “accept” button, without any need
for a signature and without an opportunity to change or amend the
conditions.
• Browse wrap contracts
A browse wrap license is part of a website and users of the site assent to
the contract when visiting it. It can be formed by use of a web page or a
hyperlink or small disclaimer on the page. A browse wrap agreement is a
license forming a part of a website and a visitor assents to the
agreement by visiting the website.
 DISPUTE RESOLUTION IN CYBERSPACE
• Cyber Appellate Tribunal
The central government shall by notification establish one or more appellate
tribunals to be known as the Cyber regulations appellate tribunals and
specify in the notification, the matters and places in relation to which the
cyber appellate tribunal may exercise jurisdiction.
• Appeal to cyber regulations appellate tribunal
Any person aggrieved by an order made by controller or an adjudicating
officer under this act may prefer an appeal to a cyber appellate tribunal
within a period of 45 days from the date on which a copy of the order made
by the controller. The cyber appellate tribunal shall be guided by the
principles of natural justice and subject to the other provisions of the act.
• Compounding of contraventions
Any contravention may, either before or after the institution of adjudication
proceedings, be compounded by the controller or such other officer as may
be specially authorized by him in this behalf or by the adjudicating officer,
as the case may be, subject to such conditions as the controller.
• Recovery of penalty
A penalty imposed under this act, if it is not paid, shall be recovered as an
arrear of land revenue and the license or the digital signature certificate, as the
case may be, shall be suspended till the penalty is paid.
• Tampering with computer source documents
Who ever knowingly or intentionally conceals, destroys or alters any computer
source code used for a computer, computer system or computer network when
the source code is kept or maintained by law for the time being in force, shall be
punishable with imprisonment.
• Hacking with computer system
Any person destroys or deletes or alters any information residing in a computer
resource or diminishes its value commits hacking. Whoever commits hacking
shall be punished with imprisonment.
• Publishing of information which is obscene in electronic form
Whoever publishes or transmits or causes to be published in the electronic form,
any material which is obscene or of its effect is to deprave and corrupt persons
who see or hear the matter contained or embodied in it shall be punished on
first conviction with imprisonment.
• Securing access to protected system contravened
Any person who secures access to protected computer system in
contravention of the provisions of this section shall be punished.
• Misrepresentation
Whoever makes any misrepresentation to or suppresses any material fact
from, the controller for obtaining any license shall be punished with
imprisonment for a term which may extend to two years.
• Breach of confidentiality and privacy
Any person commits breach of confidentiality and privacy of electronic
information or documents shall be punished with imprisonment.
• Publishing Digital Signature certificate false in certain particulars
Any person who publishes a digital signature certificate false in certain
particulars shall be punished with imprisonment.
• Publication for fraudulent purpose
Whoever knowingly creates, publishes or otherwise makes available digital
signature certificate for any fraudulent or unlawful purpose shall be punished
with imprisonment
• Confiscation
Any computer, computer system, floppies, compact disks, tape drives in
respect of which any provision of the act, rules made there under has been
contravened shall be liable to confiscation
• Power to investigate offences
A police officer not below the rank of deputy superintendent of police shall
investigate any offence under this act.
• Offences by companies
Where a person committing a contravention of any of the provisions of this act
or of any rule, direction or order made there under there is a company at the
time of contravention was committed in charge of the company for conduct of
business of the company as well as the company shall be guilty of the
contravention.
• Power of central government
The manner in which any information or matter may be authenticated by
means of digital signature
The electronic form in which filing, issue, grant or payment shall be
effected
The manner and format in which electronic records shall be filed or
issued.
The form in which an application for license may be made
The period of validity of license granted
• Constitution of advisory committee
The central government shall constitute a committee called the cyber
regulations advisory committee. The central government either generally
as regards any rules or for any other purpose connected with this act.
• Power of controller to make regulations
The particulars relating to maintenance of database containing the
disclosure record of every certifying authority.
The terms and conditions subject to which a license may be granted
Other standards to be observed by a certifying authority
The particulars of statement which shall accompany an application
• Power of state government to make rule
The state government may, by notification in the Official gazette makes
rules to carry out the provisions of the Act.The electronic form in filing,
issue, grant receipt or payment shall be effected.