1-legal & tax aspect of business-sem i

8/3/2019 1-Legal & Tax Aspect of Business-SEM I

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Syllabus for

BUSINESS LAW

Indian Contract Act, 1872;

Sale of Goods Act, 1930;

Negotiable Instruments Act, 1881;

Companies Act, 1956;

Monopolies & Restrictive Trade Practices Act, 1969;

Competition Act, 2002;


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PRESENTATION ON : -

Indian Contract Act, 1872;

Introduction to Companies Act,1956;

Structural Break-up of C.A. 1956;

MOA & AOA;

Management of a Company Directors, Meeting

Accounts & Audit;

August, 07, 2011 PGMBA / MFM -SEM- I BUS.

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Definition

Contract can be defined as An Agreement

enforceable by law is a contract. A contract,

therefore, is an agreement the object is to create

a legal obligation , i.e. a duty enforceable by law.

Essential elements of a valid contract

1. Offer and acceptancethere must be a lawful

offer and a lawful acceptance.2. Intension to create legal relationshipthere must

be an intension among the parties


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Essential elements of a Contract

that the agreement should be attached by legal

consequences and create legal obligations.

3. Lawful considerationconsideration has been

defined a the price paid by one party for the

promise of the other. An agreement is legally

enforceable only when each of the parties to it

give something and get something.4. Capacity of parties- the parties to an agreement

must be competent to contract, otherwise it


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Essential elements of a Contract(contd..)

cannot be enforced by court of law.

5. Free consent- consent means the parties have

agreed upon the same thing in the same sense.

Free consent is absent if there is coercion, undue

influence, fraud, misrepresentation or mistake.

6. Lawful object- the parties to the agreement must

agree for the valid lawful object.7. Writing and Registration- all contracts to be

legally valid, must be in writing and registered.


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Essential elements of a Contract(contd..)

8. Certainty- agreements, the meaning of which is

not certain, or capable of made being certain, are

void.

9. Possibility of performance- the contract must be

capable of performance. An agreement which is

impossible to perform, physically or legally is

void.


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Kinds of Contracts

1. Valid contract- it is an agreement enforceable

by law. Here, all the essential elements of a

contract are existing.

2. Voidable contract- an agreement which is

enforceable by law at the option of one or more

of the parties there to, but not at the option of

the other/s, is a voidable contract.3. Void contract- this contract is not binding in

law. The causes can besupervening


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Kinds of Contracts (contd..)

impossibility or subsequent illegality.

4. Unenforceable contract- this is a contract which

is valid in itself, but is not capable of being

enforced in a court of law because of some

technical defects such as absence of registration,

adequate stamping, or if time barred.

5. Illegal or unlawful contract- this contract iscontrary to the law and hence is void ab-initio.


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Kinds of Contracts (contd..)

Contracts can also be expressed ,implied,

constructive/quasi.

Quantum Meruit means in proportion to the

work done. For part performance of the contract,

resulting in a breach, a suit of QM can be brought

by the aggrieved party.


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Discussion on Companies Act, 1956

Most voluminous Legislation in the world;

The Act has 658 Sections, XV Schedules;

The entire Act is split into XIII Parts with eachPart further being split into Chapters;

The Rules and Forms are further stated in the

Guidelines / Rules, 1957;

There are many other Rules / Guidelines forsupporting the provisions of the Sections


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Functional Division of the Act

Part I - Definitions, CLB, National Company Law

Tribunal(NCLT);

Part IIIncorporation of a Co. & matters incidental thereto;

Part IIIProspectus & Allotment relating to issue of shares& Debentures;

Part IV- Share Capital & Debentures;

Part VRegistration of Charges;

Part VIManagement & Administration;

Part VIIWinding Up;

Part VIIICompanies formed under Previous Co, Law;


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Functional Division of the Act (contd..)

Part IXCos. Authorised to Register under this

Act;

Part XWinding up of Unregistered Companies;

Part XI- Cos. Incorporated outside India;

Part XII- Registration Offices,& Officers & Fees;

Part XIII- General- collection of Info. & statistics;

The XV SCHEDULES follows thereafter.


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Some Basic facts of the Companies Act, 1956

For the interpretation of each Section, there are

innumerable Case Laws from the various Courts

that have pronounced judgment supporting or

contradicting an earlier decision;

Company Law is the source from which the

subject of Auditing gets its identity, importance

and procedures to initiate Corporate Audit; The Act is heavily based on interpretation and

justification, which decides the case.


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The Administrative Machinery to monitor the

affairs is vested with the Ministry of Company

Affairs(MCA), the Company Law Board(CLB);

The routine functions are managed by the

Registrar of Companies(ROC), having Regional

Directors (RD), located in various states, where

the companies are required to file documents andReturns, and the public is authorised to inspect

the same according to the provisions of law.


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The other Regulatory Authority is the Securities

& Exchange Board of India (SEBI). Section 55A

of CA, 1956, gives exclusive powers to SEBI to

administer the issue and transfer of securities andthe non-payment of dividends as is stated in

various Sections of the Act.

In the 2006 Amendment, MCA introducede- Governance ( known as MCA-21), u/s 610

B,C,D for filing of Returns & payments.


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( contd..)

u/s 266A to G, Director Identification Number

(DIN) was introduced in 2006, to ease in the

correspondence with the ROCs and quick

identification in e-Filing;


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A Company, its Nature and Kind

Section 3(1)(i) defines a Company as A

Company formed and registered under the Act or

an existing Company. or

A company is an incorporated Association,

which is an artificial juridical person, having a

separate legal entity, with a perpetual succession

and a common seal, a common capital comprisedof transferrable shares, and carrying limited

liability. ( Saloman vs Saloman & Co. Ltd.)


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A Company, its Nature and Kind( contd.)

Section 11 defines an Illegal Association which

states that No Company, Association or

Partnership consisting of more than 20 persons

( 10 in the case of Banking Business) be formed

to carry on any business for gain unless it is

registered under the Companies Act or under any

other law. Here the Liability is unlimited andpersonal.


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Types of Companies

PRIVATE COMPANY Sec 3(1)(iii):- A company with a minimum

PUC of Rs one lac or more and which by its AOA

1) restricts the right of members to transfer shares, if any;

2) Limits the number of members to fifty , excluding members who were

or are in the employment of the company;

3) Prohibits any invitation to the public to subscribe for any shares in, or

debentures of, the company, and

4) Prohibits any invitation or acceptance of deposits from persons other

than members, directors or their relatives.


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Types of Companies (contd.)

PUBLIC COMPANY Sec 3(1)(iv):- It means a

company which :-

1) Which is not a Private Co.;

2) Has a min PUC of Rs. 5 lacs or such higher PUC, asmay be prescribed;

3) Can invite the public to subscribe to its shares & debs;

4) Does not limit the max. number of members;

5) Can invite or accept deposits from the public; and

6) Is a Pvt. Co. but subsidiary of a Public Co.


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STATUTORY CO. :- It is incorporated by a

special Act passed either by the Central or the

State Legislature;

GOVERNMENT CO. :- Section 617 defines a

GC as any Company in which not less than 51%

of the PUC is held by the Central / State Govt.

FOREIGN CO. :- Section 591 to 596 discussesabout such companies.


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Section 25 Co. :- These are Companies having

obtained the prior permission of the CG not to

include the words Ltd or Pvt. Ltd. behind

their names since they have been formed topromote commerce, art, science, religion or any

other charitable purposes and not to distribute the

profits as dividends but to plough them back for

the aforesaid activities.


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Types of Companies based on Liability of Members:-

Companies limited by shares;

Companies limited by GuaranteeSec 12(2)(b); and

Unlimited Companies - Sec 12(2)(c).

Holding and Subsidiary Company ( Sec 4);


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Exemptions & Privileges of Pvt. Co

a) Only 2 Members can start a Co. which is 7 for Pub. Ltd.

Co.Sec 12;

b) It can commence business immediately on incorporation

as it need not wait to obtain the Certificate forcommencement of business Sec 149(7);

c) Can function with 2 Directors while three are required

otherwiseSec 252(2);

d) For General Meetings, the Quorum is 2 personspersonally present which is five for pub CoSec174(1);


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Formation of a Company

It is a lengthy process involving:

Promotion

Incorporation or Registration;

Capital Subscription; and

Commencement of Business.


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Memorandum Of Association (MOA)

MOA can be defined as the Charter which

defines the limitation of the powers of the

company. The MOA contains the fundamental

conditions upon which alone the company isallowed to be incorporated.

The contents of the MOANAME clause,REGISTERED OFFICE clause, OBJECTS

clause, LIABILITY clause, CAPITAL clause &


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Memorandum Of Association (MOA)

ASSOCIATION/SUBSCRIPTION clause.

Under the Objects Clause, the MAIN and OTHER

objects shall be separately stated.

Alteration of the NAME Clause:

A company may, by passing a Special Resolution,

and with the approval of the C/G, in writing,

change its name ( Sec 21). However, no suchpermission is required for dropping/addition of


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MOA ( contd..)

the words Limited or Pvt. Ltd. to the

Companys name.

Spl Res requires 21 days notice and with 75% of

the Members present ( or through Proxy ) and

voting are in favour of the Resolution.


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MOA ( contd..)

The Doctrine of Ultra Vires:-

According to this Doctrine, all such acts or

transactions of a Company which are ultra vires

( beyond the powers of) the objects clause of its

MOA, SHAL BE WHOLLY NULL & VOID,

and can never be subsequently ratified and

validated, even though all the shareholdersconsent or purport to ratify such transaction.


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Articles of Association (AOA)

The AOA contains regulations for the internal

administration of the Companys Affairs. It

prescribes the Rules and Bye-Laws for the

General Management of the Company and for theattainment of its objects as given in its MOA.

Being subordinate to the MOA, the AOA cannot

extend the objects as defined in the MOA.


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Contents of the AOA

The extent to which TABLEA is applicable;( Table A-Regulations for management of a company limited by shares)

Different classes of shares and their rights;

Borrowing powers of Directors;

Maintainance of Books of Accts and their Audit;

Matters relating to Board Meetings;

Winding Up; and many other Issues.


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ALTERATION OF AOA

I. Sec 31- The alteration must not be inconsistent

with the prov. of the C.A.,1956, MOA or

alterations ordered by the CLB or any other

statute;

II. The alteration must not deprive any person of

his rights under a contract;

III. Approval of the C/G must be obtained incertain cases;


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ALTERATION OF AOA (contd..)

IV. The alteration must not constitute a fraud on the

minority;

V. The alteration must be bonafide for the benefit

of the company as a whole.


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Binding force of MOA & AOA

U/s 36, subject to the provisions of the Act, the

MOA and AOA shall, when registered, bind the

company and the members. This includes:-

Company is bound to its Members;

Each member is bound to the Company;

Each member is bound to other members in

exceptional cases only; and Neither the company nor the members are bound

to outsiders.


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The Doctrine of Constructive Notice states that

after the MOA and AOA is registered, it becomes

a Public Document, and a person dealing with the

company in a manner which is inconsistent withthe provisions contained therein, the person shall

be deemed to have dealt with the company at his

own risk and cost, and shall have to bear the

consequences thereof.


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DOCTRINE OF INDOOR MANAGEMENT

In contrast to the earlier Doctrine, this Doctrine

implies that persons dealing with the company

are not bound to enquire into the regularity of the

internal proceedings.

The exception to the Rule is that when the

outsider had constructive notice of the

irregularity, or where proper enquiry was not

done which could have revealed the anomaly or

the documents dealt with are forged.


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Distinction between MOA and AOA

MOA

States the broad framework

within which the Co.

functions;

The MOA is subordinate tothe Act;

The MOA must be

compulsorily filed with the

ROC;

Cannot be easily altered;

AOA

Mentions about the internal

functioning which is subservient

to the MOA;

It is subordinate to the MOA;

If Table A is adopted, then filing

not required;

Can be altered by specialresolution only;


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Distinction between MOA and AOA

MOA

Acts done ultra vires the

MOA are void and cannot

be ratified;

Outsiders have no remedy

against the co. even it isultra vires the MOA.

AOA

Acts done by the AOA,

ultra vires the AOA but

intra vires the MOA, aresimply irregular and not

void.

Outsiders can enforce the

contract if ultra vires the

AOA.


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COMPANY MEETINGS

Statutory Meetings( Sec 165)- Applicable only

for Public Ltd. Cos.- The issues discussed are:-

1. Total no. of shares allotted and its

characteristics;

2. Total cash received;

3. Abstract of the Receipts & Payments Account;

4. Names,addresses,& occupation of the Directors;

5. Particulars of contracts entered into;


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Statutory Meeting ( contd..)

6. Extent of Underwriting contracts entered into

and the reasons therefor;

7. Arrears of any dues on calls from the directors,

managers and others;

8. Particulars of any commission / brokerage paid

to the Directors.

This Meeting is held once in the lifetime of a PublicLtd. Co.


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Annual General Meeting

U/s 166, every company shall call an AGM every

year and shall notify the members accordingly.

Between two AGMs, there should not be a gap of

more than 15 months. It should be held where theRegistered Office is situated.

The issues generally discussed are- To adopt the

Accounts/ To declare a dividend/To appoint or

reappoint Directors and To appoint the Auditors

& fix his Remuneration.


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Convened General Meeting by C/G

U/S 167, the C/Govt. can convene a General

Meeting if default occurs in holding an AGM u/s

166. This generally happens when the Directors

are not ready with the Accounts, or the Auditorsare Qualifying the Statutory Audit Report which

can doubt the integrity of the Directors.


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Extra-Ordinary General Meeting

u/s 169, the Board can, on requisition of the

Members, shall call this meeting to discuss

specific issues.

The Members so requesitioning, should hold atleast 10% of the total voting power.

Section 171 to 186 discusses on Meetings:-

Sec 171- Length of Notice21 days notice inwriting is required.

Sec 173- Explanatory statement attached to the


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Meetings ( contd..)

Notice explaining the facts and reasons for the item

to be discussed.

Sec 174- Quorum5 members in the case of a

Public Company and 2 members in the case of aPvt. Co.

Sec 175Appointment of a Chairman.

Sec 176- Proxiescannot speak at a meeting andcan vote only if there is a poll.

Sec 189- Ordinary & Special Resolution- It is 49:51


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Meetings (contd..)

for passing an O/R and 75:25 for passing a S/R.

Sec 190Resolutions requiring Special Notice.

Sec 192- Registration of certain resolutions and

documents;

Sec 205- Dividends to be paid only out of profits;

Sec 205C- Unclaimed dividend to be transferred to

Investor Education & Protection Fund


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Books of Accounts & Audit

Sec 209Books of Accounts to be maintained by

the Company;

Sec 210- At every AGM, the Balance Sheet and the

P&L Account to be placed;

Sec 212- Balance sheet of Holding Co. to include

details of Subsidiaries;

Sec 217- Board Report - the state of companysaffairs, amounts to be transferred to Reserves,

amount to be recommended as dividend, material


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Boards Report

changes that have taken place between the B/S date

and the date of the Report, activities of the

Company and its Subsidiaries, remuneration

received by executives exceeding Rs. 24 lacs perannum.

Sec 217(2AA) discusses about Directors

Responsibility Statement which states that the

Accounting Standards have been followed, due

prudence has been applied, proper care has been


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taken to safe guard the assets and to prevent frauds

and irregularities, and lastly the Accounts have

been prepared on a Going Concern basis.


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The Actual Reality

Facts, as such, never settled anything.

They are working tools only. It is the

implications that can be drawn from facts

that count, and to evaluate these requires

wisdom and judgment that are unrelated

to the computer approach to life.

CLARENCE B. RANDALL


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