business law notes sem ii

7/31/2019 business Law Notes Sem II

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Books:-

1. Business law for management2. Elements of mercantile law by N.D. Kapoor ( Reference )

3. Business law for management by Bulchandani ( Reference )

Business Law

Business:- All those activities which are aimed at transfer of goods & services from the

production centre to consumption centre carried out by an entrepreneur by optimally utilizing

resources at his command i.e. money, man, material & machine with a view to maximize profit.

Law:- Rules & Regulations which has a force of authority, passed by legislative bodies.

LAWS

Constitutional Law Criminal Law Civil Law International Law(Relating to rights, (Crime & Punishment) (Business & Property (Dealing between

duties of citizens matters) citizens of two

towards the state countries)& administration)

Contract Act

Contract:- Agreement enforceable by Law.

Agreement:- It is every promise or a set of promises forming consideration for each other. It is

a result of intention to create legally binding relationship.

Promise:- Proposal when accepted becomes promise.

Proposal:- When a person signifies to another his willingness to do or not to do something witha view to obtain assent of that other person, the person is said to have made a proposal.

Proposal + Acceptance = Promise

Promise * Promise = AgreementAgreement + Enforceability = Contract


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Q1. Discuss essential ingredients of a valid contract? Or All contracts are agreements but

all agreements are not contracts.

Ans.

1. Intention to create legally binding relationship2. Offer and Acceptance

3. Two or more persons

Section 10 All agreements are contracts if they are made by

Free consent

Parties competent to contract

For lawful consideration

And lawful object

And not expressly declared to be void

4. Competence of parties to the contract Every person is competent to contract if

He attends the age of majority according to which he is subject of

He is of sound mind Not disqualified under law

5. Lawful consideration6. Free consent of parties Consent is free if it is not caused by

Coercion (Force) use of physical force

Undue Influence use of dominant position

Misrepresentation false statement

Fraud cheating

Mistake erroneous state of affairs

7. Lawful Object

8. Certainty of performance9. Not ambiguous / vague(the agreement must be certain)10. Legal Formalities

11. Not declared to be void

Q2. Offer and Acceptance

Ans.

Rules for a valid offer:-1. Offer should be capable of creating legally binding relationships

2. Offer should be backed by willingness to perform. Mere intention is not an offer

3. Offer should be communicated e.g. Lalman Shukla (Civil Plaintiff, Criminal

Complainant) v/s Gauri Datt (Civil Defendant, Criminal Accused if guilty is calledconvict if not guilty then is called acquit)(PPS Gogna Pg no.20)

4. Objective of the offer is to obtain approval / acceptance of offeree

5. Offer should be differentiated from

Intention

Invitation to offer for e.g.


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a) Super Bazaar

b) Prospectus

c) Tender d) Auction Notice

6. Offer may be conditional

7. Offeror cannot dictate terms

Acceptance:- When a person to whom offer is made signifies his assent there to he is said to

have accepted the offer/proposal.

Rules for valid Acceptance:-

1. Acceptance to be valid must be absolute and unconditional

2. Acceptor must be willing to perform his obligation3. Acceptance must be communicated to the offeror

4. Acceptance must be communicated within a reasonable time

5. Acceptance must be in the manner prescribed

6. Acceptance must be communicated before offer lapses / withdrawn Lapse of offer offer no longer valid

Expiry / Lapse of time

Revocation Cancellation of offer by offeror

a) Notice of revocation

b) Communication in same channel

Conditional acceptance / qualified acceptance / counter offer

Non compliance of terms and conditions

Death in respect of contracts of personal skill

Rejection

Rules as to communication of offer & acceptance :-( better in PPSG Pg. no.27)1. Offer:- Communication of offer is complete when it comes to the knowledge of the

person to whom it is made.

2. Acceptance:- Communication of acceptance is complete

o To against offeror when communication of acceptance is put into transmission

so as to be beyond the control of acceptor

o As against acceptor when it comes to the knowledge of offeror.

Open letter dated 01-08-2005

Letter received by offeree 05-08-2005 Communication of offer is

completeLetter of acceptance dropped

on

08-08-2005 Communication of

acceptance is complete as

against proposal

Letter of acceptance received

on

10-08-2005 Communication of

acceptance is complete


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against acceptance

Competence of Parties to contract:-(Legal Competence)

Whether a person has

o Power In Law

o Authority

Every person is competent to contract open letter dated 01-08-2005 if

1. he has the age of majority according to the law to which he is subject

2. he is of sound mind3. he is not disqualified under the law

- a person has attained the age of majority incase where guardians have been appointedunder guardianship law.

Legal Position of Contracts with Minor:-

Who is Minor:- A person who has not attained the age of majority

Validity:- Contracts with minor are void-ab-initio (from the very beginning)

e.g. Mohori Bibi v/s Dharmodas Ghose

1. Anyone who contracts with minor does it on his own risk2. No ratification (no regulation)

3. Contracts with minor cannot be rectified even after he has attained the age of majority.What is required is to sign a fresh contract

A & B (jointly contract with) C (Major)

- Contract is void between B & C. The manager i.e. A has to take full responsibility ofminor B and his actions.

4. Minor deliberately misleading his age

Contract remains void

Court may take cognigence & award compensation

5. Minor cannot become a partner in partnership firm. However if all the partners agree

minors may be admitted to benefit of the firm6. Minor cannot become member of a company unless

Articles of Association of the company permit

Shares are fully paid

7. Minor can act as an agent

Minor will have no personal liability


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8. Minor cannot be declared insolvent

9. No degree of specific performance against minor

10. Anyone who provides necessaries to minor can recover the amount from minor even byattaching his property

Sound Mind:-

Every person is of sound mind (for the purpose of entering into contract) if at the time of

making contract he understands

Terms & conditions of the contract

Impact of terms & conditions on his personal interest

If he can understand this then he is said of sound mind.

Idiot Person:- Person whose mental capacity is permanently affected. Such person can never

enter a contract.

Schizophrenia Epetopsey:- Mental capacity is temporarily under an attack of a disease. Such aperson can contract during the period of normalcy

Drunk Person:- Such a person dont contract under influence of intoxication

Lawful Consideration:-

BasisPrice

Something in return Quid Pro Quo

Right, interest, benefit, or profit accruing to someone as against responsibility, detriment,sacrifice or loss suffered or incurred by someone else.

Q3. No Consideration, No Contract Discuss giving Exceptions.

Definition of Consideration:- When at the desire of promisor, promise or other person has

done or abstained, does or abstained, promises to do or abstained from doing something. Such

an act or abstinence is called consideration & contract without consideration is void.

Essential Features of Consideration:-

1. Consideration must move at the request of promisor desire of promisor cannot beignored. E.g. Durga Prasad v/s Baldeo2. Consideration may move from promisee or any other person. E.g. Chinnaya v/s

Ramaiya

3. Consideration can be past, present & future.4. Absence of act, forbearance or sacrifice may also be a good Consideration.


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5. Consideration need be real & not imaginary/illusory.

6. Consideration need not be adequate.

7. Consideration must be lawful

If it does not violate the provisions of the law

If it is not forbidden by law

If it does not result into injury to person or property If it is not against public policy

Circumstances where contract without Consideration may not be void:-1. Contracts made under natural love & affection provided agreement is in writing,

registered & between parties in near relation. E.g. Raj lukhee Debee v/s Bhootnath

2. Promise to compensate for past voluntary service rendered service must be voluntary& not a legal duty

3. Promise to pay time barred debt

Must be in writing

Must be signed by debtor

4. Gift Donation without consideration5. Charitable contribution e.g. Kedarnath v/s Gauri Mohammed

Coercion:- Consent is obtained by coercion when it is obtained by:-

1. Committing or threatening to commit

2. Offense punishable under Indian Penal Code3. Detaining or threatening to detain unlawfully property of a person

Features of Coercion:-1. Use of physical force

2. Violent in nature

3. Even a threat is enough4. Offense may be committed or threatened is punishable under Indian Penal Code5. Threat to commit suicide is punishable & it can result in coercion. E.g. Amiraju v/s

Shesamma

Consequences of Coercion:-

1. Consent is not free

2. Contract is voidable

Person who gave consent under coercion can avoid or cancel the contract

Undue Influence:- Consent is induced by undue influence when relationship subsisting

between the parties are such that one is in a position to dominate the will of another & uses thatposition to obtain unfair advantage over the other.

Relationship where undue influence may be presumed:-

1. Where there is real or apparent authority e.g. master & slave, father & son.


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2. When the parties stand in fiduciary relationship. E.g. CA & client, lawyer & client, guru

& disciple

3. Where mental capacity is temporarily affected on account of age & disease e.g. doctor& patient

Consequences of Coercion:-1. Consent is not free

2. Contract is voidable

Coercion Undue Influence

Meaning Use of physical force Use of dominant force

Nature Violent May not be violent

Relationship Not required There must be relationship

Who can exercise Third parties can exercise

Only by parties under

relationship

Misrepresentation:-1. False statement by a person who believes it to be true

2. Breach of duty without intention to deceive, giving unfair advantage3. Causing however innocently, party to make a mistake regarding subject matter of

contract e.g. Rex v/s Kylsant

Effects of Misrepresentation:-

1. Consent is not free

2. Contract is voidable3. Person who gave consent can cancel the right of cancellation / rescission

Person must have depended

Cancellation must be within a reasonable time

Person should not have affound the contract or taken benefit of the contract

Fraud:- Means & includes any of the following with intention to deceive1. False statement by a person who does not believe it to be true

2. Active concealment of facts

3. Promise without intention to perform4. Anything fitted to deceive

5. Anything which law may declare to be fraudulent

- Mere silence is not fraud, unless there is duty to speak- Negligence is no fraud e.g. Derry v/s Peek

Misrepresentation Fraud

Intention No intention to cheat There is intention to cheat

Knowledge of false statement Person making false statement

does not know statement is

Person making false statement

does know statement is false


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false

Claim for damages No claim for damages available Claim for damages available

Mistake:- Error or erroneous state of affair. When a party intending to do one thing, by error,

does something else.

LAWS

Mistake of Law Mistake of Fact

Indian Law Foreign Law Bilateral Unilateral

(Ignorence of law (Treated as mistake (Both parties are (Only one party atnot excused) of fact) at mistake Void mistake

Contract Contract)isnt void)two exceptions

Identity of person contracted with Nature of contract signed

Contract becomes voide.g. Cundy v/s Lindsay

Agreements expressly declared to be void:-1. Agreement with parties incompetent to contract

2. Contract without consideration

3. Contract with unlawful consideration4. Contract with unlawful object

5. Contract with mutual mistake of fact

6. Contracts in restraint of marriage


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7. Contracts in restraint of trade:- Any agreement which takes away the freedom it would

amount to restraint of trade/void.

Reasonable Restrictions

Sale of Goodwill Partnership agreements Trade/Business Consideration ServiceContract

8. Contracts in restraint Legal Proceedings

o Right to seek legal remedy if refused Void

o Agreement where period of limitation is reduced

o Exception Reference to arbitration

9. Contracts the meaning of which is uncertain

10. Contracts by way of Wager

11. Contracts contingent on uncertain event when event becomes impossible

12. Contracts to do impossible things

Agreement by way of Wager:-

Betting / Expenditure Agreement:- Promise to pay or moneys worth if an uncertain event

turns one way & if the event turns otherwise, person will receive instead of paying.

Uncertain Transactions which are not wagers:-

Lottery

Cross word puzzles games

Horse racing Sports event

Stock exchange trading Investment Science Insurance socially beneficial

Agreement to impossible acts (void):-

Contingent Contracts:- Contract to perform or not to perform if an uncertain future event

collateral to the contract does or does not happen.

Q. Rules relating to enforceability of contingent contract

1. Contract contingent on happening of an event

Such contract cannot be enforced until the event takes place

If the event becomes impossible contract is void


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2. Contract contingent on non-happening of an event such contract cannot be enforced

until it is clear that the event shall never take place

3. Contract contingent on future behavior of an individual event shall be consideredimpossible if a person behaves in such a way that he cannot come back to the original

position

4. Contract contingent on happening of an event within a specified time Such contractcannot be enforced until the event takes place within a specified time

5. Contract contingent on non-happening of an event - such contract cannot be enforced

until it is clear that the event shall never take place within a specified time6. Contract contingent on impossible events

Quasi Contracts:- Circumstances in which there is no offer, no acceptance or no formal

contract but law enforces duty. This duty is as good as contract (as if contract was signed)

Based on Principles of Equity & Justice

No one shall be permitted to be unjustly enriched at the expense of another

Q. Why should law impose duty?

Circumstances in which law imposes duty:-

Reimbursement of amount spent towards necessaries supplied to a person incompetent

to contract

Reimbursement of payment due from someone else but person paying is interested in

such payment

Reimbursement of act done or service rendered non gratuitously, not out of charity & oncommercial terms

Responsibility of finder of goods a person who finds goods belonging to another and

takes them into his custody is placed with responsibility of a bailee The article delivered price paid under coercion or mistake

Discharge of Contract:- Contractual relationship comes to an end & nothing remains the same

1. By Performance

Actual

Attempted

2. By Agreement

Novation New agreement is substituted in place of old

Alteration Existing agreement is modified

Rescission Right to cancel agreement

Remission Accepting less than in agreement in final settlement

Merger Right to receive & right to pay both come in the same hands

Waiver Withdrawal of contractual terms

3. By Operation of Law


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Death

Insolvency

Merger

4. By Impossibility of Performance

At the Time of Contract Void

Subsequenti. Permitted as excuse

Distribution of subject matter

Outbreak of war

Change of law

Change of state of affairsii. Not Excused Difficult to perform

5. Breach of Contract

Actual Breach of Contract

Anticipatory Breach of Contract

Breach of Contract:- Contractual obligations not carried out in agreed manner.

Actual (On due date of

performance)

Anticipatory (Before the actual due date intention not to perform is

communicated)

The other party can

treat this

communication asbreach of contract on

the date of receipt of

communication

The other party can wait till actual due date

We can perform on due

date (alternativearrangement)

If we fail it will be

breach of contract onactual due date

Consequences of Breach of Contract:-

Suit for Damages(Estimate of monetaryloss suffered on

account of non

performance)Normal Arising out

of normal course of

Suit for SpecificPerformance InjunctionCourt order restrictingthe parties

Quantum Meruit- As much as ismerited

- Where contrac

is abandoned orcancelled

- Contract


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businessSpecial Parties hadestimated or

convisaged

Exemplary Puritive

by way ofpunishment

Nominal Taken butin recognition of rights

of the party

becomes void

- When contracis voidable &

party decides to

cancel

- In the meantime part of the

contract isalready

performed

payment is

required to bemade to the

extent o

performance

Guidelines for determining damages:-- Damages to be on account of proximate cause & not remote cause e.g. Headley vs

Baxandle

- Damages must arise out of & during the normal course of business- Person claiming damages must show his sincerity in mitigating the losses

- Amount of damages claimed can never exceed the actual loss suffered

Companies Act

Company:-

Association of person Registered under the companies act 1956

By contributing to capital which is

divided into shares

which are transferable

& with limited liability

having perpetual existence

common seal

& being an independent / artificial juridical person

can own, posses, dispose of property

can sue & be sued

Essential features of Companies Act:-

1. Association of person registered under the act having separate legal entity the

company has separate legal entity different from members e.g. Solomon vs. Solomon &Company Ltd.


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2. Limited Liability Liability is limited to extent of uncalled / unpaid amount of

shares

3. Transferability of Shares Shares of the company are transferable & memberscan sell them any time when they want. A person can cease to be a member whenever he

desires to quit

4. Perpetual Existence Company never dies except through due process of law5. Common Seal Seal is signature of a company

6. Property can be purchased in the company name. Company can own, posses /

dispose of the property7. Can Sue Company can file suit against own name & can be sued against

All 7 points together is termed as Corporate Entity / Veil which acts as a curtain

Q. What do you understand by corporate veil & under what circumstances the corporate

veil can be pierced?

Circumstances under which corporate veil can be pierced:-

. Loss Of Revenue to the State e.g. Dinshaw Maneckji Petit vs CIT2. Company assuming enemy character e.g. Daimler & Company Ltd vs

Continental Tyres & Rubbers Company

3. Improper Conduct e.g. Gil Ford Motor Company vs Harne4. Fraud

5. Statutory provisions:-

Membership is reduced below minimum & business is carried on for 6 months or morethen all the members are personally liable

Misdescription of Name

Misfeasance Proceedings Criminal breach of trust

Types Of Companies:-

Types of Companies

On the basis of Statute(act)

Companies formed under

special charter East India

Company

Co-formed under special

statute act RBI

Co-Registered under

companies act Reliance Ltd.

Liability Company with limited Liability

Company with unlimited liability Kotak Mahindra Capita

Company

Capital Contribution With Share Capital

May not have share capital Liability limited by


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guarantee(Indian Institute o

Bankers)

Number of Members Public Ltd

Company Min 7 & Max

(no upperlimit)

Marketability

of shares

Unlisted

(CloselyHeld)

Listed

Private Ltd Company Min 2& Max 50 (Excluding

present/past employees who are

shareholders)

Basis of Control Holding Company

- which controls

appointment of majorityof directors in other

company

- which holds majority ofshares of other companies

- Subsidiary of Subsidiary

is subsidiary of holdings

Subsidiary Company

Basis of Government

involvement Government

Company

- Audited byCAG(Comptroller &

Auditor General of India)

- Annual report is placedbefore the parliament

- 51% of capital is held by

government(Central,State, Other Govt. Co.

PSUs if registered under

companies act)

Geographic Parameter

(Place of Incorporation)

Foreign Companies (All MNCs)

Face Value As may be issued by the company as Re. 1, 5, 10, 100.

Book Value (Paid up Capital + Reserves & Surplus Accumulated Losses) / No. ofshares issued

Market Value As quoted in the Market

Incorporation of a Company

Promoter:- One who promotes the company. One who conceives the idea of setting up businessin the form of a company.


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Name:-

Application for availability of name

Form No. I A

Payment fee of Rs. 500/-

Suggest the name by which he would like his company to be incorporated with 3 other

alternative names

Names which are not Available / not Desirable

Names of existing companies

Phonetic Similarity e.g. J.K. Industries LTD. & Jay Kay Industries

Cannot use international bodies / national bodies

Relevance of business name & business should be maintained

Relevance between name & size of authorized capital

NAME AUTHORISED CAPITAL

If Coporation 5 crores

International / Globe / Global / Asia / Asiatic /

Intercontinental

1 crore

Above words used in between name 50 lacs

Hidustan / Bharat / India as first name 50 lacs

Above words used in between name 5 lacs

Industry / Udyog 1 crore

Enterprise / Products / Manufacturing 10 lacs

Documents to be submitted for Registration

1. Memorandum Of Association To be stamped according to the value ofauthorized

2. Articles Of Association capital3. List of Directors on Form 32 (In Duplicate)4. Consent of persons who have agreed to become Director on Form 29 (only in respect of

Public LTD Companies)

5. Declaration that provisions of Company Law have been complied with Form I (signed

by Director / Advocate / CA / PCS)6. Particulars of registered office on From 18

7. Registration Fee

Certificate of Incorporation

Issued by Registrar of Companies (ROC)

on satisfying that requirements of company law have been complied with Conclusive evidence as regards

i. Registration of Company

ii. Compliance to Company Law

Birth certificate of Company Corporate features become operative from this date


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If the company is Private LTD Company then it can commence its business

immediately on incorporation

If company is Public LTD Company then it has to obtain additional certificate Certificate of Commencement of Business

Certificate of Commencement of Business Company must have to raised minimum subscription to commence its business

Minimum Subscription Is the amount which in the opinion of Directors of the Company

sufficient to commence the businessIn respect of IPO / Subsequent public offer Minimum subscription is 90% of the amount

of public offer of an issue of shares (if minimum subscription is not raised entire

application amount is to be refunded)

Approval from the stock exchanges at which the shares of the company are proposed to

be listed must be obtained (If stock exchanges refuse listing, the application amount will

have to be refunded)

Directors should have taken & paid qualification shares if any

Audited receipt & expenditure account since incorporation Declaration by Director that Company Law has been complied with

Memorandum Of Association (MOA)

Character / Constitution of the Company

Fundamental Document

Contents of MOA

Q. Discuss significance of object clause in MOA & Doctrine of ultra vires vis--vis the

object clause

1. Name Clause Name of the Company is ____________________

2. Registered Office Clause The registered office of the company is located in the state

of _____________________3. Object Clause

Main objectives the company will pursue on its incorporation

Objects ancillary to main objects

Other objects* Need for Object Clause

Positively Speaking Object Clause specifies the areas of operations in which the

company will deploy its funds Negatively Speaking Company will not deploy its funds in the areas beyond what is

stated in the object clause

Comfort of investors / members

Creditors

Anything beyond the object clause is ultra vires


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Ultra Vires contract is invalid

Company is not bound

Directors may incur personal liability

4. Liability Clause e.g. Asbury Railway Carriage & Iron Company vs Riche. Liability of

members of the company is limited

5. Capital Clause Specifies the maximum amount company is authorized to raise e.g.Authorized Capital of the company is Rs. 50 crore divided in 5 crore equity shares of Rs

.10 each

6. Subscription / Association Clause Names, Addresses, Undertaking to the shares,Signature duly witnessed

Alteration of Memorandum Of Association

1. Change of Name

Compulsory Voluntary

Where existing company object the name to

similar / identical

ROC to issue order- First show cause notice

- Hearing

- Order

When the members of the company wan

to change

- availability of new name to be checkedup

- approval of members to change name a

AGM / EOGM- File copy of Resolution with ROC

- ROC to issue fresh certificate of

Incorporation with new name- Newspaper Advertisement

2. Change of Registered Office - Change of office from one area to another within same town

First decision at meeting of Board of Directors Board resolution / record of decision to be filed with ROC

Form 18 for change of address to be filed with ROC

Advertisement

- Change of office from one town to another within same state

First decision at meeting of Board of Directors

Approval of members with special resolution (3/4 th of members present

& voting) at AGM / EOGM


Advertisement

- Change of office from one state to another First decision at meeting of Board of Directors

Approval of members with special resolution (3/4 th of members present

& voting) at AGM / EOGM


Application to CLB at the Regional Director of Zone for approval


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Publication of hearing before CLB

Inviting objections (from state government, workers or creditors)

Order will be issued approving change of registered office

Filing of CLB order with ROC

Advertisement

3. Change of Object Clause Why Change of Object Clause

- New Technology

- New Products / Services which could be simultaneously undertaken- Amalgamation / Merger of different companies with objectives

Take Over / Acquisition Merger / Amalgamation

Gujarat Ambuja ACC with majority

shareholding of ACC

Indian Rayon, Indo Gulf Fertilizer & Birla

Finance became Birla Nuo

- Cancellation of any objects

Procedure - Decision by Board Of Directors

- Approval of Members at AGM / EOGM by passing special resolutionfor amending object clause- Approval to be obtained from ROC

Advertisement inviting objections if any

Hearing if required

ROC will give approval

ROC to give certificate approving change in object clause

4. Liability Clause never amended

5. Capital Clause can be changed / amendedProcedure for change in capital clause

i. Decision by Board of Directorsii. Approval of members at AGM / EOGMa. By passing ordinary resolution simple majority if there is power to amend

capital clause in the AOA

b. By passing special resolution if there is no provision of alteration of capitalclause in the AOA, 75% majority in favor of change

iii. Filing with ROC Form no. 5 duly stamped & additional registration fee

6. Association / Subscription Clause Not Ammended

Articles of Association (AOA)

Q. What do you understand by Doctrine of Indoor Management? Discuss significance &

relevance of AOA

Bye Laws / Rules & Regulations for company law requirements

Internal Procedure to be followed by a company


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While MOA is compulsory for all the companies, AOA is optional for public LTD

companies. In case of Public Ltd company does not prepare AOA, Table A (Model ByeLaws / AOA for Public Ltd Companies) of Schedule II of Companies Act will apply

Contents of AOA

1. Procedure relating to Share Capital

Issue of share certificate

Issue of duplicate share certificate

Transfer Shares

Transmission

Forfeiture of shares2. Matters relating to

Meetings of the members

Types of meetings

Procedure at meetings

Issue of notice

Quorum requirement

Proxy

Voting

Resolution3. Provisions relating to Directors

Meeting of Directors

Powers of Directors

Powers of Chairman / Managing Director

Borrowing Powers of the company

Accounts & Audit Seal

4. Significance of AOA

Bye Laws / Rules governing internal company law requirement

Doctrine of Indoor Management

Doctrine of Constructive Notice

Office of ROC is Public office

Whatever is filed with ROC can be inspected by the public by paying inspection fee

Information filed with ROC is deemed to have been given to public

Every person who deals with company is presumed to know whatever is filed with ROCbut nothing beyond this. Therefore a person can presume that company has complied

with all the procedural requirements

He is not required to investigate whether the company has in fact complied with suchrequirements e.g. Royal British Bank vs. Turquand


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Limitations to the Doctrine of Indoor Management

Knowledge of Irregularity

Forgery

Circumstances giving rise to Suspicion

Raising The Resource for the Company

Short Term

- Working Capital facility from bank

- Sundry Creditors

- Outstanding Expenses- Public Deposit maturing within one year

- Commercial Papers

- Inter-corporate Loans- Factoring Limit

Long Term

Capital Equity & Preference

Debentures(Bonds)

Term Loans

Public Deposit maturing after 1 year (Max. 3

years)

GDR Global Depository Receipt Shares not issued, only certificate issued in other thandollar, listed on foreign exchanges

ADR American Depository Receipt

FCCB Foreign Currency Convertible BondsECB External Commercial Borrowing

Raising Long Term Funds through Equity

How much / what amount of Equity

Size of Project Detailed Financial plan with focus on its predetermined activity with specified

investment ensuring desired monetary return

- Detailed Project Report Details of investment on land, building, plant &

machinery, furniture & fixtures, installation, contingency provision, margin for

working capital- Means of Finance Capital 30 crores (Equity 10 crores; IPO through

prospectus & Debt 20 crores)

IPO Through issue of Prospectus

Legal Aspects

1. Companies Act Provisions relating to prospectus

2. SEBI Act 1992 Disclosure for SEBI guidelines3. Securities Contract Regulation Act Listing guidelines of exchange


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Coordination can be done by Merchant Bankers (Tie up Means of Finance)

Entry Norms Of SEBI

Only Public Ltd companies have access to capital market

- Track record of dividend payment in 3

out of 5 preceding financial years

- Net worth of the company should be not

be less than 1 crore in last five financialyears

- IPO cannot exceed an amount more than

5 times its net worth

- Newly incorporated company / in

Greenfield project

- Project has to approved by Financia

Institution / Banks- Approving Authority must have

participated to the extent of 10%

- There should be compulsory markemaking for 2 years

Draft Prospectus

Primary Responsibility Merchant Banker companies Secretarial / Finance Department to

provide necessary output

Contents of Prospectus Companies Act (Section 62)

It should also follow disclosure norm of SEBI for investors to take informed decisions

Also keep in mind listing guidelines of the stock exchanges where the shares areprepared to be traded in 2 parts

Part 1 (General Information)

Name

Registered office

Main objectives of the company Authority for the issue

Terms of issue (no. of shares, Price Fixed price or Market price to be discoveredthrough book building process). Payment to be made on application or allotment.

Issue Program Issue Opens on, Issue Closes on, Earliest Closing

Lead Managers or Co-Managers

Bankers to the issue

Brokers to the issue

Registrars for the issue

Underwriters for the issue (optional)

All these agencies have to give their written consent to be enclosed & filed withprospectus when it is filed with ROC

Part 2

Background of the Company & the management


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Board of Directors Names, Addresses, educational qualification & experience as

well as details of other directorship

Other group companies under the same management

Objectives of the issue

Details of the project cost of project, means of finance, availability of raw material

Utilities Marketing / Selling Arrangements

Schedule of implementation

Outstanding litigation

Stock exchange data

Risk factors affecting the business

Management perception in respect of risk factors

Audited financial performance for last 5 years

Draft prospectus to be filed with

SEBI Stock exchange where shares are proposed to be listed

After SEBI clearance prospectus is filed with ROC

Red Herring Prospectus

Where price / no. of shares issued by the company is not mentioned in the prospectus

Price is discovered through book building

Lead managers lead book runners

Other members syndicate members

Price band (floor price max. price are mentioned) Lead Merchant Banker prepares a

research report on the company. Presentations are made before QIBs (Qualified

Institutional Bankers) called Road shows. QIBs indicate their interest in the issue. Bidsare invited. Cut off price is decided

The prospectus is filed with ROC

Basis of allotment prepared by registrar to issue

Return of allotment to be filed with ROC

Self Prospectus:- Only for Banks & Financial Institution

Filing of issue of prospectus which will be issued for 1 year

Details of shares subscribed & allotted are filed with ROC

Authorized Capital:- Maximum amount the company is authorized to raise as per capitalclause of MOA

Issued Capital:- Number & amount of share capital issued to the public

Subscribed Capital (90%) & Paid Up Share Capital:- Shares subscribed by the investors

(which may not be less than 98% of issue amount)


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Paid Up = Subscribed Capital less calls in arrears

Shares

Equity (3)

Those shares which are not preference shares

(risk capital) No assurance as to return of investment

No certainty as to return on investment

Preference (1)

Which can enjoy preferential rights

Dividend

Redemption

Equity

Voting Rights Without Voting Rights (not more than 25% of

paid up share capital)Equity shares with differential voting rights

Preferential Rights:-

1. Cumulative / Non Cumulative Preference shares where the right to dividend isallowed to be accumulated even if company has not declared dividend & the dividend

will be payable in the year when the company has adequate profit are called cumulative

preference shares & preference shares where dividend is not allowed to be accumulated

are called non cumulative preference shares.2. Participative / Non Participative Participative Preference shares are those which are

allowed to participate in share of profit after payment of dividend on equity from out of

surplus profit left. Non Participative Preference shares are not entitled to anyparticipation in surplus profit. They are entitled to agreed dividend

3. Convertible / Non Convertible Convertible Preference shares are those which areconverted into equity. Non Convertible Preference Shares are those which are notconverted into equity

4. Redeemable / Irredeemable Redeemable Preference shares are those which will be

redeemed / repaid within max period of 10 years. Irredeemable Preference shares cannot

be issued5. Cumulative Convertible Preference shares Right to dividend is accumulated.

Preference shares are converted into equity

Shares issued at Premium Shares issued at

Discount

Shares issued at

Par

Buy Back Shares

- shares issued at valuehigher than the facevalue

- share premium can be

utilized for

writing off

- Rs. 10 shares issuedat Rs .9 per share

- company when

issues shares at a

price less than the

face value

Shares issued atface value

Market price is relatedprice multiples of EPS(Earnings / No. o

shares)

- company can buy

back 25% of its


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preliminary

expenses

Bonus issue of

shares

Expansion

- Rs. 10 share issued at Rs.120 (Share Capital

Rs.10 & Share PremiumRs. 110)

Not more than10% unless

approved by

central govt.

Approved by

members byspecial

resolution

Shares

forfeited are

issued atdiscount

paid up capital

- buy back from

accumulated

profits

reserves

proceeds ofprevious issues

of shares- there must be

provision in AOA

- buy back can be by

purchase of odd

lots

open markepurchases

reverse book

building shares tendered

under buy back

must becancelled within

7 days

Meetings of Members:-

Statutory Meeting AGM EOGM

- held once under the act

hence statutory- To be held only by Public

Ltd Company. Pvt. LtdCompany not to hold this

meeting

- held once in life time

- it is held between 1 6months from the date of

obtaining certificate of

commencement of business

- Can be held by Public / Pvt.

Ltd company- Held every year

- With 6 months from end ofaccounting year

- One meeting per calendar

year

- 1st meeting to be held within18 months from the date of

incorporation

- between 2 AGMs gap notmore than 15 months

- Obtain approval of ROC ifgap exceeds 15 months

- Can be held by Public / Pvt

Ltd company- Can be held any time when

the matter is urgent- It cannot wait till next AGM

- Any meetings of members

other than AGM are EOGM

Agenda

Statutory Meeting AGM EOGM


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Consideration of Statutory

Report- Report explaining the

progress made since

incorporation of the

company- Receipts & payment a/c

- Shares issued & allotted- Important contracts signed

by management

- To be filed with ROC


Report- P&L a/c

- Balance sheet

- Auditors report

- Directors reports- Corporate governance

report


Report

Procedure to Conduct meetings of members

Authority to convene a meeting Board of Directors Every general body meeting

must be presided by Board meeting

Notice Specify time (working time), Day (Working Day not a Sunday or public

holiday Negotiable Instrument Act), Date & place of meeting (registered office orother place in the town in which registered office is located, 21 day clear notice date

of posting & date of receipt to be excluded under certificate of posting)

Agenda for Meeting For AGM agenda is divided in 2 parts1. Ordinary Business

Approval of P&L, B/s Passed by ordinary resolution

Declaration of dividend

Appointment of auditor

Appointment of Directors

2. Special Business

anything other than ordinary business

explanatory statement should be given in the notice

reason why business is taken up

disclosure of interest of any director

At EOGM all business matters are special business requiring explanatory stand

Procedure to conduct meetings of members on the date of meeting

1. Chairman the designated chairman to preside over the meeting. If there is nodesignated chairman, the members to choose one of them as chairman of the meeting

2. Quorum Minimum no. of members required to be present at the meeting

a. As per provisions in the articleb. If articles are silent, in case of Public ltd company 5 persons, in case of Pvt ltd

company 2 persons shall form quorum

c. Quorum must be present within half an hour from the scheduled time ofcommencement of meeting


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d. If quorum is not present within half an hour, meeting is adjourned to next week,

same time, same place

e. If at the adjourned meeting quorum is not present, persons present shall form thequorum

3. Proxy a member is entitled to attend the meeting or depute a person to attend on his

behalf by executing instrument of proxya. Proxy need not be a member

b. Proxy form should be lodged with the company 48 hours before the scheduled

time of commencement of meetingc. Proxy may be open or with specific direction to vote or against the resolution

d. Proxy is cancelled if member attends the meeting

e. Proxy cannot speak, but vote at the meeting

4. Movement of Resolutiona. Resolution is proposed by 1 of the members

b. It is seconded by another member

c. Decision on the resolution members can raise questions chairman to answer

d. Report of auditor is read at the meeting5. Chairman to ascertain the sense of the meeting (whether the resolution has been passed

or not)a. Voice vote - Ordinary resolution requires simple majority

b. By show of hands - Special resolution requires 3/4th majority

c. By divisiond. By ballot

e. By poll

6. Minutes record of resolution passed is written in minute book to be signed by

chairman of the meeting7. Special resolution are passed to be filed with ROC

Resolutions

Ordinary Special Resolution requiring specianotice

- Simple majority

- Ordinary business of rule ispassed by simple majority

- Requires 3/4th majority

- Amendment in MOA- Amendment in AOA

- Appointment of MD

- Remuneration of MD- Appointment of sole selling

agent

- Can be done by postalballot for listed companies

- Removal of a Director

- Removal of an Auditor


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Q. Discuss the provisions relating to qualifications, appointment, powers & removal of

directors of the company under companies act?

Director Director means a person who holds position of a Director by whatever name called

1. Agent of the Company Director functions as an agent of the company acting on behalf

of the company

2. Trusteesa. of the members for the property owned by the company

b. must observe at most good faith (trust & confidence)

c. act in the benefit of the company & not for personal profit3. Managing Organ Through which the company operates / functions

4. Professional Employees Director has to be an individual & not an incorporated body

Appointment of DirectorsNo. of Directors minimum in case of Public ltd company 3 &Pvt. Ltd Company 2. Maximum no. as may be permissible in AOA

1. First Directors Names in AOA. In case articles are silent all the subscribers to MOA /

AOA shall be deemed to be the first director. These directors shall held office till AGM2. Subsequent Directors by the members at AGM. 1/3rd of the directors can be non

repairable & 2/3rd of the directors will be liable to retirement. Of this 2/3rd ,1/3rd will

retire every year. Retiring directors can offer themselves for re-appointment.Reappointment by members at AGM

3. Directors appointed by Board of Directors

a. Appointment of additional directori. BOD can appoint additional director (not exceeding the max. no.

provision in AOA) to take benefit of expertise as well as experience ofany individual

ii. Such director will hold position till next AGM. At next AGM he may bere-appointed

b. To fill up casual vacancies

Members Contribute to

the capital of the company& control the company by

executing voting rights at

meeting

Appoint Auditors to check& control performance of

company which is

managed by directors

Report to members

Power to manage the

company given to Board

of Directors who are

responsible for day to daymanagement


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i. On account if vacancy arises, BOD can appoint a director to fill up the

vacancies

ii. Death, resignation or Disqualificationiii. Such director to hold office till next AGM

c. Alternate directors - When the director leaves the state in which registered office

of a company is locatedi. For a period more than 3 months

ii. Board may appoint alternate director to attend the Board meeting in

absence of original directoriii. The alternate director attends Board meetings in absence of original

director

4. Appointment of directors by outsiders There can be an agreement by the company

witha. Its lenders or

b. Creditors

Whereby its nominee of lenders / creditors may be appointed in the Board

c. Such directors are not liable to retirement5. Power of Government / NCLT (National Company Law Tribunal) to appoint director on

the Board of the Companya. Where there are complaints about mismanagement of the company &

b. Investigation have been carried out

c. Or complaints before NCLT about the affair of the company being conductedagainst the interest of the members. NCLT / Government can appoint Director

on the Board of the Company

d. These directors are not liable to retirement

Qualifications Qualifications if provided in AOA the director will have to take up

qualification shares within 2 months of appointment. For shares upto face value of Rs. 5000/-

Disqualifications Person is disqualified1. if he is of unsound mind

2. undischarged insolvent

3. he applies for declaring himself insolvent4. he has been sentenced to imprisonment for a period not excluding 6 months, for offence

involving moral turpitude & a period of 5 years has not expired

5. he is director in a company

a. company has defaulted to file annual return & balance sheet for a consecutiveperiod of 3 years with ROC

b. Company defaults in payout of interest / principal of deposits from public

Max. no. of companies - a person can be director in max. 15 companies excludingPvt, ltd Companies

Vacation of office of Directors

1. on attracting disqualification

2. if a director fails to attend 3 consecutive Board meetings without leave of absence

3. if director fails to take qualification shares within 2 months


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4. if he fails to pay call money on shares within 6 months

Removal of a Director

1. Removal by the member at AGM

a. By not reappointing retired Director

b. By appointing someone else in place of retiring directorc. By passing a resolution removing a director

2. Removal of Director by NCLT

Powers of a Director

1. General Power General Powers to be exercised keeping in view

a. Provisions of companies act

b. AOAc. Contract with the company

i. Directors have general power to do all those things which a company is

empowered to do

2. Powers which can be exercised at Board Meeting there has to be board meetings (min.4 meetings in a year, 1 every quarter)

a. Power to make calls on sharesb. Power to issue debentures

c. Power to borrow

d. Power to make investmente. Power to make political donations total Rs. 50000/- or 5% of net profit

whichever is higher

3. Powers which can be exercised with consent of members

a. To sell any undertaking (division) of the companyb. To borrow in excess of paid up capital & reserves

c. To amalgamate / merge other company / with other company

d. To appoint sole selling agente. To amend MOA / AOA

f. To fix remuneration of MD

Account & Audit Books of a/c / registers to be maintained by the company

Assets of the company

Liabilities of the company

Register of sales

Register of purchases for manufacturing operations

Registers for

o Raw materialo Labor

o Utilities

o Other expenditure

P&L & B/S as per schedule VI


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Dividend to be paid to be paid only out of current profits

1. provided for depreciation2. rules relating to transfer of profits to reserve

Profit Transfer to Reserve

10% - 12.5% 2.5%12.5% - 15% 5%

15% - 17.5% 7.5%

Above 17.5% 10%

3. a/cs to be audited by the auditors

Q. Discuss provisions relating to appointment, qualification & powers of auditors of the

company under the companies act 1956?

Audit under the companies act is statutory audit. Every company under the companies act is

required to have its accounts audited by the auditor

Auditor

CA member of ICAI having certificate of practice &

He is not in the full time employment

Not indebted to the company for amount exceeding Rs. 1000/-

Should not be related to Directors

Powers of Auditor

1. Power to have access to all documents agreements / contracts / minutes

2. Power to visit / verify / check properties / assets of the company at all locations (plant,

branch. HR)3. Power to obtain information / explanation from the employees of the company4. To report to the members

a. Whether the company has maintained the required books of a/c or registers

b. Whether the company has been complying with accounting standardsc. In case of variation point out the impact on P&L of the company

Certify That

1. P&L a/c gives true & fair view of profit & loss for the year

2. Balance sheet gives true & fair view of financial position of the company as on a

particular date

a. Auditors to qualify the report where there are irregularitiesb. Directors to reply to qualifying remarks of auditors


31/36

NEGOTIABLE INSTRUMENTS ACT 1881

Transferable documents which are used for transfer of movable property. Negotiable instrument

means Promissory Note, bill of exchange & Cheque

Q. Define promissory note & differentiate it from bill of exchange & a cheque

Promissory Note

Instrument in writing

Not being a bank note or currency note


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Signed by the maker

Containing an unconditional undertaking

Ta pay certain sum of money only

To a certain person on his order

Bill of exchange

Instrument in writing

Signed by the maker

Containing an unconditional order

Directing a certain

To pay a certain sum of money only

To certain person or his order

Cheque

Bill of exchange drawn on a specified banker

Promissory Note Bill of Exchange Cheque

1. Parties Involved 2 parties maker whopromises to pay &

payee (promise) who

collects payment

3 parties

Drawer / maker

who draws

the bill

Drawee on

whom the bill

3 parties

Drawer

maker of a

cheque

Drawee Bank

25/11/2005On demand I promise to pay Rupesh Pandey sum of Rs. 50000/- forvalue received

To Rupesh Pandey Signed by maker / promissor

25/11/2005

On demand pay Rupesh Pandey sum of Rs. 50000/- for value received

To Drawee (who has been directed to pay) Signed by maker / promissor

Bank of Baroda 25/11/2005

Pay Rupesh Pandey

In Words Figures_________ Signed by maker / promissor


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is drawn or to

whom directionto pay is given

Payee - Whocollects the

payment

Payee - Whocollects the

payment

2. Nature of

relationship

Maker DebtorPayee - Creditor

Drawer Creditor vis--vis Drawee but

Debtor vis--vis Payee

Drawee DebtorPayee Creditor

Drawer Creditor vis--vis Bank but Debtor

vis--vis Payee

Drawee Bank Debtor

Payee Creditor

3. Nature of liability Maker of promissory

note is primararily

liable

Drawee Primary

Liable

Drawer Secondary

Liable

Bank Primary Liable

Drawer Secondary

Liable

4. Acceptance Not Required Acceptance by draweerequired

Not Required

5. Crossing N.A. N.A. Only cheque are

required to be crossed

6. Stamp Duty Attracted Attracted Not Required

7. Notice of dishonor Not Required Required Bank issues non

Payment memo

8. Special Provisions

a. Drawee in case of

need

N.A. N.A.

b. Acceptance for

Honor

N.A. N.A.

Q. What do you mean by crossing of cheques? Discuss various types of crossings & their

significance?

Meaning When a cheque bears across in face two parallel transverse lines with or without theword

And company

& company

not negotiable

Cheque is said to be crossed

Significance crossing is an instruction to the bank not to pay cash across the counter

Types of Crossing

General Crossing Special Crossing Restrictive Crossing


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When the cheque bears across

its face two parallel lines withthe name of a particular banker

then the cheque is said to have

been specially crossed to that

bankSignificance Banker to whom

the cheque is specially crossedIs the only authorized banker to

collect the payment

When the cheque bears across

its face two parallel lines withthe words a/c payee only or

payees a/c only cheque is said

to be restrictively crossed

Significance Cheque cannobe deposited in any other a/c of

payee

Significance of cheques crossed with the words not negotiable words not negotiable do not

prohibit the transferability of the amount of a cheque but it is a warning that the title of the

person receiving the cheque will not get better than that of the person from whom he gets it

Negotiations Process whereby the amount mentioned in Negotiable Instrument is transferred

to another personBy mere delivery Endorsement & delivery

If negotiable instrument is drawn payable to

bearer

Negotiable instrument drawn payable to order

Q. What do you understand by endorsement? Discuss various types of endorsements &

effect thereby by giving suitable examples?

Endorsement Instruction to transfer the amount of negotiable instrument to another person

Person who gives the instrument Endorser

Person in whose favor endorsement is given Endorsee

First Endorser Payee

Allonge Additional slip attached to check for endorsement

Types of Endorsements

1. Endorsement in Blank where payee or endorser merely signs the instruments at the

back for the purpose of transfer amount of Negotiable Instrument. Effect orderinstrument becomes bearer instrument & amount can be paid by mere delivery

2. Endorsement in Full when payee or endorser gives full instructions as to whom the

amount of Negotiable Instrument is to be transferred. Effect - The person in whosefavor endorsement is made is entitled to collect the amount of Negotiable Instrument or

further endorse3. Restrictive Endorsement when payee or endorser restricts further endorsements arerestricted. Effect Endorsee will have collect the amount by depositing the Negotiable

Instrument in his a/c

4. Conditional Endorsement when payee or endorser attaches conditions to transfer of

amount of Negotiable Instrument. Effect Endorsee will have to comply with terms ofendorsement


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5. Partial Endorsement when payee or endorser transfers part of the amount of

Negotiable Instrument. Partial Endorsement is invalid. Exception Incase where Bill of

Exchange contains a note that part amount is already paid Negotiable Instrument willstand reduced to that amount

6. Facultative Endorsement when payee or endorser forgoes his right or increases his

responsibility. Effect Endorser continues to be held responsible even if notice ofdishonor was not served on him

Bill of Exchange drawn by Ramesh Sinha

Drawee AmitPayee Angad

1st Endorsee Abbas

2nd Endorsee Shardul

3rd Endorsee - Asif7. Endorsement Sans-resource when payee or endorser makes further endorsement

without having any reference to himself. Effect The endorser is not available for any

reference / remedy

8. Endorsement sans frais when payee or endorser transfers without his availability tocontribute towards expenses. Effect Endorsee cannot depend on contribution on

endorser

Q. Define Holder in due course & discuss privileges of holder in due course

Holder in Due Course

A B C D E F

Drawer Drawee Payee Endorsee1 Endorsee2 Endorsee3

Holder A person in possession of Negotiable Instrument in his own name. entitles to receive

the amount

Holder in due course A person who became

Possessor of Negotiable Instrument payable to bearer

Payee or endorsee of Negotiable Instrument payable to order

For consideration

Before maturity

Without having sufficient cause to believe that

Defect existed in the of the person from whom he derived it

Privileges of the Holder in due course1. All the previous parties are liable to HIDC

2. HIDC can file suit for recovery in his own name against all the previous persons

3. Drawee cannot refuse payment to HIDC on the grounds that the bill wasaccommodation bill Bill drawn without consideration


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4. Drawee cannot refuse payment on the ground that bill is fictitious where either drawer

or payee are not existing

5. Drawee cannot refuse payment on the ground that bill is inchoate Bill which isstamped & signed but incomplete / blank in respect of other details

6. Holder in due course is entitled / authorized to fill up / complete inchoate stamped

instrument7. Drawee cannot refuse payment on the ground that bill is unconditional / escrow where

bill has been drawn & accepted subject to certain conditions

8. Once the Negotiable Instrument passes through the hands of HIDC it gets cleansed ofall its defects

9. Capacities of previous parties cannot be questioned

10. Every holder is pressured to be holder in due course